Brexit, Bank of England and interest policy

Yesterday whilst a quiet day on the markets, was a significant day for the progress of Brexit. Boris’s Withdrawal Agreement Bill was finally passed and received the royal assent to turn it into UK law. Boris’s ‘oven ready’ deal has however undergone a few disagreements over the exact ingredients, with a number changes made by the government immediately after the election.

Boris quickly used his new majority to implement a hard deadline of December 31st 2020 for trade talks with the EU, whether a deal has been negotiated or not. Other extra ingredients include minister powers to change the law without MPs getting to vote (particularly in Northern Ireland), the removal of parliamentary voting powers in relation the EU trade talks, and the scrapping of Lord Dubs amendment that would see unaccompanied refugee children be united with their family if they lived in the UK. This last amendment was first rejected by the House of Lords, only to be re-installed by the commons as Boris used his new majority to its full advantage.

Whilst Brexit moves towards the transition period in the background, markets are currently focussed on the UK economic growth and the Bank of England meeting next Thursday. Traders are currently betting on whether or not the Bank of England will implement an interest rate cut of 0.25% at the meeting next week. 2 of the 9 MPC members have already voted for a rate cut and the previous 2 meetings, meaning a further 3 votes are necessary for the cut to go ahead. As many member have already been on record since the new year stating that they are watching data closely with the consideration of also voting for a reduction in interest rates.

Since then November growth came in 0.3% lower, inflation headline dropped from 1.5% to 1.3%, and retail sales contracted again in December. This has lead to a 70% expectation from the markets that a cut would happen next Thursday. This probability was then reduced yesterday after a CBI survey showed increased optimism from business owners, raising the question of whether a recovery in growth could be still seen in the coming months and therefore warrant a delay on this decision. With this news Sterling hit a 1 month high against the Euro, however it is important to recognise the fragility on which these gains are built.

Today we have the last key indicator for MPC members and markets to digest ahead of the BoE meeting next week. In a new format, we will at 9:30am get preliminary forecasts for January’s PMI growth in the manufacturing and services sector, with the actual results in the first week of February. Poor results and a probabilities of a rate cut will once again increase at set the tone for the next week, or if a recovery in growth is evident then further gains could be seen for the pound in the sort term. Anyone with a short term interest in currency exchange may wish to pay close attention to these results to have with the decision of timing your trade.