BoE To Wait & See
The upcoming BoE meeting this week has lost some importance following the bank’s last meeting in August at which the BoE raised rates by a further .25% (rates are now back above 0.5% for the first time in a decade) though signaled that another rate hike is unlikely until after the March 2019 Brexit deadline.
Given the discussions held at the last meeting, it seems reasonable to expect the BoE to vote unanimously in favor of keeping rates on hold at this juncture, which is likely the start of a long waiting period until the Brexit deadline passes. The BoE was keen to highlight the uncertainty around Brexit at its last meeting and the growing fear of a “no deal” Brexit which would negatively impact the economy.
Statement Unlikely To Change Much
Given that little has changed since the last meeting, the accompanying statement is expected to show very few alterations with the bank simply reaffirming its “wait and see” approach. While there have been some positive developments since the bank last met, namely EU Brexit negotiator Michael Barnier saying that the EU is prepared to offer the UK a trade deal unlike any it has offered before, nothing concrete has happened and certainly nothing significant enough to spur the BoE into raising rates again.
Domestic Data Showing Strength
There have also been some positive developments on the domestic data front. The latest monthly GDP data from the ONS showed that GDP growth rose 0.3% in July, well above the 0.1% expected and the prior 0.1% growth rate in June. The quarterly figure now stands at 0.6% which is the strongest reading since August 2017 with the service sector, construction and production all having risen over the period.
Alongside this, the latest trade balance data showed the goods deficit having significantly narrowed to a five-month low of £10bln with the overall deficit in July had fallen to just £111 billion. This is now the fourth best set of monthly trade data in the past twenty years.
Furthermore, the latest employment data showed wage growth rising faster than expected in the three months to July at 2.6% on the headline reading and 2.9% on the ex-bonus reading, while the unemployment rate remained at 4%, levels not seen since 1975.
Brexit Remains Key Obstacle
Despite the positive data, however, Brexit remains the key obstacle on the horizon. While Barnier has said that the EU will offer the UK a deal, May still needs to have any formal deal approved in Parliament and given the massive rift within her government currently, this will be no easy task. If negotiations continue to struggle and a deal is left down until the last minute, this is likely to have far stronger repercussions for the UK economy, heightening investor uncertainty and likely prolonging the time until the bank see fit to raise rates again.
Alternatively, if May can pass a deal through parliament quickly and forge the way for a smooth Brexit transition period, then this will allow for a far quicker pickup in the UK economy, keeping the BoE on course to raise rates again shortly after the Brexit deadline, likely at the May meeting.
Carney To Extend His Term at BoE
In terms of alleviating investor uncertainty, one further supporting factor has been the announcement this week that BoE governor Mark Carney has offered to extend his term to stay on and help with the Brexit transition. Speaking to MPs yesterday, the BoE chief said he is “willing to do whatever” he can to help Brexit run smoothly.
Positioning Data Suggests Upside Risks
Although we’ve seen some minor short covering, GBP downside positioning remains at extended levels which makes the prospect of further meaningful GBP downside a difficult one. Positioning at this level also exposes the market to bullish risks in response to any positive Brexit headlines and or BoE commentary. So, if the BoE does acknowledge recent data strength and positive developments within Brexit negotiations then we could see some sharp upside as shorts unwind some of their exposure.