Posted February 02, 2017 Ashley Chadwick
Normally, the Bank of England’s Quarterly Inflation Report will be the most important document for the future of the UK economy on the day it is published. Today though it is taking a backseat to the White Paper released detailing (for want of a better word) the Government’s plan for Brexit. That being said, it was still the decision from the Bank of England, the QIR and the press conference that Governor Carney gave that spurred the financial markets into action.
The growth forecasts for the UK have been increased after some pessimistic predictions that were made in the wake of the Brexit referendum. The UK is expected to grow by 2% in 2017, a forecast that has risen from 0.8% in August and 1.4% in November. This would reflect only a small slowdown compared to 2016 growth and is only 0.3% lower than the prediction before the vote in May last year. There was also a small 0.1% rise in projections for 2018 and 2019. These changes were based on measures announced by the Chancellor in the Autumn statement, little slowdown in consumer spending and stronger global outlook. The negative side of this growth is that inflation is expected to be above the 2% target for the next 3 years. Peaking at 2.8% in early 2018. In response to this a number of the members of the MPC indicated that the call to hike rates is becoming a close one.
There was also good news seen in the expected level of unemployment, which will remain below pre financial crisis levels. It is currently 4.8% and is expected to creep up to 5%. This is an improvement over an expected rise in unemployment to 5.6% in the coming years, as had previously been reported by officials. Once again though this does not tell the entire picture, with growth in real household income expected to fall to close to 0.
Cable has seen some big swings today. Initially buoyed by the minutes of the Monetary Policy Committee meeting, it rallied to just short of $1.27. Then sentiment reversed and Sterling began to fall, currently trading $1.2558, having been as low as $1.2540. The Pound is down over 1% on the day against the Euro, having just held the €1.16 level, trading at a low of €1.1601. The Gilt responded in a similar manner, initially falling, but has since rallied and is now up nearly a point on the day, at 124.32. This move has been reflected in the short sterling strip, where we are up significantly today, some outrights are up by 10 ticks.