The UK has outperformed expectations following the vote to leave the EU, with the Bank of England already cutting interest rates to record lows, will they need to act again to stabilise the UK economy?
Global inflation has been under pressure this year following the surge in oil prices at the beginning of the year. In the UK however inflation, in more recent times, has been holding up well. This is as a direct result of the referendum and the depreciation of Sterling’s value making things more expensive to import. Yesterday this was confirmed with the released of Production Price index, this was again steady at 0.6% for August.
As inflation remains higher than most it re-confirms the potential, strengthens the argument that the Bank of England (BoE) rate cut on track for this year. Something which would be negative for the value of the Pound, the BoE’s next meeting is tomorrow.
This morning we have the latest update on the UK unemployment levels following the Brexit vote. Due to the uncertainty about the future of the UK economy and its place in the world moving forward, many large companies have introduced a freeze on employment and indeed there has been lots of talk about companies relocating to mainland Europe.
As a result many expect unemployment in the UK to remain under threat, today’s release is expected to confirm these concerns so expect the Pound to be under pressure this morning.
Thursday afternoon we have the latest update from the Bank of England (BoE), this following the interest rate cut to record low levels last month. In August the BOE also increased the amount of QE and introduced other policies which surprised the market. There seems to be a view within the bank that prevention is probably cheaper than a cure with regards to trying to avoid a UK recession next year, which the BOE have themselves highlighted.
The release tomorrow will be keenly watched for hints as to their future policy’s and appetite for a further cut in interest rates. They kept this option open when Governor Carney and other members were at the Treasury Select Committee last week.
Thursdays announcement will most likely have one of two impacts on Sterling’s value; either they change nothing with a view that they need more time to review the economy following the changes last month, which will have little impact on Sterling value, or if they do suggest a further cut or indeed introduce a fall this month Sterling’s value will most likely fall.
As a result, if you are a Sterling seller moving before this event seems wise as there is much more risk than reward, if however you are a Pound buyer, waiting for the news could give you an advantage as we reach the end of the week.
Personally I expect UK interest rates to be cut again at their November meeting when the next Quarterly Inflation report is released. This will keep Sterling under pressure moving forward.
Further Sterling movements are likely if the Bank of England do decide to take further measures to stabilise the UK economy. Speak to our brokers if you have an upcoming currency transfer and have questions surrounding Thursdays decision.
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