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Bothered by Brexit, BOE Becomes Bearish

Matt Eidinger December 20, 2018

In a Dr. Jekyll to Mr. Hyde transformation, the Bank of England (BOE) turned somewhat dovish at this morning’s monetary policy meeting, and became a touch more bearish on the UK’s economic outlook.

As expected by markets, the bank’s Monetary Policy Committee voted unanimously to keep interest rates at 0.75% and to maintain bond purchases at £ 435 billion, citing inflation as being only slightly over the bank’s target rate of 2%. Mark Carney and company were cognizant of turmoil in energy markets as well, noting that declining oil prices could cause inflation to fall to 1.75% as early as January and remain there for the foreseeable future.

GDP was forecast to grow at a slower pace than the 1.75% that was forecast at the November meeting, but no specific numbers were given.

The most notable turn away from the previously upbeat evaluation of the UK economy comes in the BOE’s take on the UK’s recent divorce troubles with the European Union.

The Bank’s anxiety about Brexit has escalated over the course of the past few months. In today’s statement, the BOE said, “Brexit uncertainties have intensified considerably since the Committee’s last meeting. These uncertainties are weighing on UK financial markets.”

As the bank also notes, corporate bond spreads have widened considerably in 2018 and the pound sterling has depreciated to the lowest levels of the year against the USD.

​​​​​​Still, there was some optimism in their report, with the belief that “The broader economic outlook will continue to depend significantly on the nature of the EU withdrawal . . . The monetary policy response to Brexit . . . will not be automatic and could be in either direction.”

Immediately after the release the GBP rallied against the greenback, erasing some of December’s recent losses. On the other side of the Chanel, GBP was a modest 15bps weaker against the EUR.

Prime Minister Theresa May only has until March 29 2019 to either obtain parliamentary approval for her Brexit plan or renegotiate new terms with the EU. Right now, neither option seems likely – which could raise the possibility of a disorderly Brexit acting as a catalyst to further increase volatility and weaken the pound.

Across the pond, the Federal Reserve Bank of Philadelphia released its business outlook survey for December this morning as well, registering 9.4 – notably worse than the 15.5 that markets were expecting and the lowest level in almost two and a half years.

Beneath the headline figures, positive sentiment was still visible in certain sections of the index, with new orders registering a 5% increase, a quarter of firms reporting increased employment and 42.4 % reporting increased input prices. Manufacturers remained optimistic concerning business conditions over the course of the next six months as well.

Lastly, the Department of Labor reported seasonally adjusted initial jobless claims rose to 214, 000 during the week ending December 15th. This is moderately better than what markets were expecting at 219,000 new claims.

Bottom Line: Recent Brexit turmoil weighed heavily on the Bank of England during its final meeting of the year. British economic growth and inflation forecasts were both revised downward, but the Bank left the door open to tighten or loosen monetary policy depending on the final deal with the EU. In North America, FX markets were largely unchanged after mixed US data, since the focus remains yesterday’s Federal Reserve decision.

Matthew Eidinger
Fintech Specialist, Dealing Operations

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