At the end of last week, there were indications from various members of the Bank of England’s Monetary Policy Committee (MPC) hinted that a rate cut might be imminent
In an article in the Financial Times on Sunday, MPC member Gertjan Vlieghe stated, “I really need to see an imminent and significant improvement in the UK data to justify waiting a little bit longer.” This meant that the pound had a tough start to the week but there was a silver lining amongst the clouds.
GDP monthly statistics showed the UK economy shrank by 0.3% in November, lower than forecast which led to NIESR estimates that GDP stagnated in the final quarter of the year. Manufacturing output fell 1.7% in November while the broader industrial production was down 1.2%. The Prime Minister taking an optimistic tone regarding Brexit in an interview gave the pound a much-needed boost; he did sound a small note of caution but his opinion was that it would be “epically likely” that an agreement will be reached with the EU ahead of the 31 December deadline.
Sterling was soon on the back foot again after UK inflation data came in lower than expected. The consumer price index rose 1.3% in the year to December while the retail price index was up by 2.2%; the numbers had no lasting impact on the pound but did come hot on the heels of dovish comments from MPC member Michael Saunders, who argued in a speech that “Britain risks getting stuck in a low-inflation trap if the central bank does not take early action to boost the economy.” The belief amongst investors is that it is not a question of if, but when there will be a rate cut. The speculation put pressure on the pound as investors weighed up the possibility of a 30th January rate cut against the possibility of a wait until the next opportunity on 26th March.
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