UK Economic health, will the Bank of England cut interest rates again?

Last week Consumer Price Index was released for September and showed a climb to the highest levels seen since November 2014. Inflation expectations also reached a 22 month high and this all resulted in the pound going up in value. GBP/EUR levels now sit at multi week highs before we start another period of volatility which is expected to start as of this afternoon.

Mark Carney, the head of the Bank of England (BoE) is scheduled to speak this afternoon at 15:30 BST and will be keenly watched for hints on future central policy changes. There has been a very public disagreement between the Bank of England and Government around Inflation. That being as the Pound is so weak it makes our imports a lot more expensive. Matt Davies, Tesco’s UK chief executive, warned that food inflation caused by the weak pound could prove “lethal for millions of people struggling to live from week to week”. This is not a problem straight away but in the future inflation is expected to be greater than wage inflation meaning the poorest are out of pocket potentially impacting their votes.

The Bank of England have their Quarterly Inflation Report and interest rate decision next week. This being the event when a further interest rate cut in the UK could happen. This cut would certainly weaken the GBP/EUR exchange rate further and I would expect it to result in GBP/EUR going toward parity before Christmas if rates are cut further. If they don’t however it is a very strong indicator to the market that the health of the UK economy is good and we could see Sterling push upwards. Next week’s event is certainly one for everyone to watch out for and any indicator towards this in this afternoon’s event could drive market movement for the next week.

UK Autumn Statement

Within the next 30 days we also have the Autumn Statement, the first for Philip Hammond as the UK Chancellor. Expect the focus to be on tax and spending decisions for the spring budget but it seems he is of a mind to spend more to create more growth within the UK.

UK GDP figures impact on the Pound

One of the largest economic events driving market movement this week will be the latest GDP figures which are released on Thursday. This is the first estimate for Q3 this year, the first for the period following the referendum result. It is expected to show a contraction in activity as the ‘eye of the storm’ was felt with the economic and business shock waves of the result being felt with business generally slowing down.

This, if confirmed, could easily put Sterling on a negative path for the following days, making everything from property in Europe to holidays in the USA more expensive. If you are buying currency this week moving sooner rather than later may be wise.

Growth forecasts longer term are a little mixed as a result of the EU referendum. Growth is expected to slow in 2017 and climb thereafter. The average forecast for UK GDP growth this year are up to 1.9% for 2016 from 1.6% post referendum. However, the leave result has hit growth forecasts for next year, which currently sits at just 1.0% for 2017 representing a sharp downturn, similar to the contraction seen in 2012, as the UK felt the effects from the Euro crises and the recessions seen across mainland Europe. Longer term most see growth pick up again thereafter as the initial Brexit shock dissipates. The International Monetary Fund estimates UK growth will average 1.6% in each year between 2018 to 2021. This however is still down from 2.2% that they forecasted pre-referendum.

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