BNY Mellon IM: Commentaar op meeting Bank of England

BNY Mellon IM: Commentaar op meeting Bank of England

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The Bank of England worries about sterling volatility, but in truth this just reflects political uncertainty

With interest rates already set ultra-low the Bank of England may be forced to assess the tools it has left to curb the economy. Ahead of the rate decision next Thursday, Shamik Dhar, chief economist at BNY Mellon Investment Management considers the outlook for the UK & sterling and evaluates the policy options available:

‘The Bank of England (BoE) is not expected to change inflation rates from 0.75% and the market appears to have accepted the current rate. But markets appear to be less focused on the BoE and more concentrated on potential changes coming out of the Houses of Parliament. Business investment in the United Kingdom has been lower than in many other countries and the UK economy shrank by 0.2% in the latest quarter. This said, employment levels remain very high and people are still confident about keeping their jobs, or even moving, despite the prospect of a no-deal Brexit. Robust real wage growth at the bottom of the income distribution also helps.’

‘Recent volatility in the pound has sparked concerns for the currency as its movements have been compared with that of an emerging market currency. Over the past two years we have seen a lot of movement in the pound stemming from Brexit uncertainty. We expect that with the market keeping a close eye on UK politics, it will continue to be subject to these shifts in confidence for the next few months.’

‘Despite concerns, sterling benefits from being a floating currency and plays an important role as a shock absorber.  A lower pound will go a long way towards offsetting the higher costs of trading with the EU, and will continue to make UK assets look cheaper to foreign investors.’