BOE Backs Down From Easing Bias

Ahead of the November monetary policy meeting BOE governor Mark Carney noted that there are limits to the bank’s willingness to look through inflation. The sharp decline of Sterling over the last two months alongside an aggressive move higher in gilt yields seemed to unsettle the BOE who have since backed down from previous guidance that rates would be cut again this year.

The policy message in November, that the bank would be adopting a neutral bias going forward, alongside a slew of stronger than expected UK data readings has offered support the UK currency. Whilst the BOE is clearly going to remain vigilant, given the policy risks associated with Brexit, the Bank is highly unlikely to announce any further easing at this meeting and will instead reaffirm their neutral stance.

Brexit Developments Continue To Drive Price Action

Political developments concerning the UK’s Brexit negotiations continue to impact both investor sentiment regarding UK markets and the direction of Sterling. The sharp drop in Sterling since the June referendum has had a significant impact on UK inflation expectations. However, GBP has recovered well off the October lows on growing hope that the UK will now be able to avoid a hard Brexit scenario and retain Single market access.

Following a more than 6% decline over October, GBP found some support in November as the UK’s High Court ruling appeared to bolster hopes of avoiding a hard Brexit by ruling that parliament and not the government, hold the power to decide when Brexit can be triggered. Although the Supreme Court will not publish its decision on the PM’s appeal until at least early January,the government appears to have avoided the risk that the Court would go against it by achieving the support of a majority of MPs to commence Brexit talks by end March 2017 in line with the government’s original plan.  Markets have also been encouraged by comments from Brexit Minister Davis that the UK would consider making a contribution for continued access to the EU’s Single Market.

Print Friendly, PDF & Email