Uncertainty Plagues GBP As BoE Meets This Week

BoE to Keep Interest Rates Unchanged.

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It has been a busy week for the pound sterling as investors had a lot of information to digest. This included economic reports and new developments on the Brexit front.

Data showed that the UK’s economy was nudging along albeit at a slower pace due to the seemingly endless Brexit uncertainty. Going forward, this could only mean that investment in the UK will continue to take a hit.

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The data comes ahead of this week’s Bank of England monetary policy meeting and a few additional economic reports. These include the monthly inflation and employment figures for February.

UK GDP Enters Q1 on a Soft Note

On the economic front, data from the UK’s office for national statistics (ONS) showed that the UK economy was somewhat mixed but saw an overall pick in activity in different sectors, from manufacturing to services and construction.

GDP rose 0.5% on a month over month basis in January. This followed a 0.4% decline in December, according to the preliminary estimates from the ONS. The data beat the median consensus estimates of a 0.4% increase.

UKGDM3M Index
UKGDM3M Index (UK Gross Domestic 2019-03-18 13-30-05

UK GDP rose 0.2% on a 3-month basis in January. This was in line with the median estimates. Growth, as measured during the three-month period weakened, with a fall in manufacturing and construction repair works.

Although growth was sluggish, the economy bounced back following a weak data set from December.

The monthly manufacturing, industrial and construction output data was released. Manufacturing activity grew at a pace of 0.8% in January following a 0.7% decline in December. This was the first time that manufacturing output expanded since the middle of last year.

Industrial production advanced 0.6% in January, reversing the 0.5% decline from the month before. The data also beat estimates of a 0.2% increase for the month. Meanwhile, construction activity advanced 2.8% and erased the declines of 0.8% in December.

Bank of England to Remain on the Sidelines

Overall, the data showed that the UK economy entered the first quarter of the year on a softer footing. The data is likely to deter the Bank of England officials from hiking interest rates in the near term.

The Bank of England has held rates steady at 0.75%, largely due to the Brexit uncertainty. However, it said that rates would be hiked in the future regardless of the Brexit outcome.

While there were expectations that the BoE could hike rates in 2019, this is turning out to be unlikely.

The Bank of England will be holding its monetary policy meeting on Thursday. We can expect no changes and the outlook for 2019 continues to remain grim when it comes to interest rates.

At its previous meeting, the central bank cut the growth outlook citing a lot of negative risks to the economy and thus the monetary policy. This is unlikely to change at this week’s meeting. Officials voted unanimously to keep interest rates unchanged at 0.75%.

UK Labor Market Continues to Improve

On Tuesday, the monthly jobs figures showed that the UK unemployment fell to fresh lows of 3.9% against expectations of a no change at 4.0%. The average earnings index in the three months to February rose 3.4% on an annualized basis. This was higher than the expected increase of 3.2%. And the previous month’s data underwent a revision higher to show a 3.5% increase.

While the better than expected jobs report pushed the prospects of a rate hike from the Bank of England, it is unlikely that the central bank will act at this week’s meeting. In fact, it’s unlikely to act until there is more clarity on the Brexit agreement with the EU.

Upcoming Data: Inflation Report 

Experts expect the inflation data which is due today to ease to 1.7%. In January, the UK’s annual inflation rate eased to 1.8%. It marked a steady decline in inflation from 2.4% in November last year.

The Bank of England had forecast that inflation would remain close to the BoE’s target rate of 2.0% after initially overshooting the target last year.

Regardless, the UK’s economic data this week is unlikely to see the BoE shifting its stance.

Brexit Uncertainty Continues

Developments on the Brexit front continued to show uncertainty. While there was initial excitement about the new deal with the EU, the optimism faded after some key members of the Parliament publicly said that they would vote down the deal.

On Tuesday last week, the UK parliament rejected the new Brexit deal despite “legal assurances” from PM May. This led to the UK parliament holding another vote on Wednesday evening on a no-Brexit deal.

The vote on no-Brexit meant that members of the parliament could vote on whether the UK should leave the EU without a Brexit deal in hand. Members rejected the vote indicating that the UK is looking to avoid a hard Brexit.

Negotiations are still on with speculation that the Brexit deadline of March 29th could be further extended. However, this complicates matters as the EU is holding the general elections to the European Parliament in mid-May.

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