REPORT
By Gökhan Kurtaran
London letter, week beginning August 1

Eyes on Bank of England’s monetary policy decision

This week markets will follow final manufacturing and services PMIs across the globe. Data from China, Japan, Europe and the U.K. are all on the calendar with a big focus on the Bank of England (BoE). The pound will again be in the spotlight as the Bank of England will announce its monetary policy decision and reveal its brand new post-Brexit economic forecasts via the Quarterly Inflation Report.

The market takes a 25 basis points cut in the U.K. bank rate for granted, as the BoE will certainly revise the growth forecast to the downside following Britain’s decision to leave the European Union.

If interest rates are cut, it will be the first time they have changed since they were set at 0.5 percent in March 2009. Last month there was already some expectations from the Bank of England to cut rates, but the bank remained cautious and likely wanted to take the decision in August along with the Inflation Report. The committee has dropped heavy hints that it will act this week when fresh forecasts for the economy are published. Mark Carney, the Bank’s governor, warned before the referendum that voting to leave could push Britain into a recession. We will also possibly see some downward revisions of the growth projections which would indicate the growth path of the economy in the long run.

Is the recession evitable or avoidable? It will be the new main challenge of the U.K. economy while negotiations continue informally with EU member states to reach a deal. There is no doubt that U.K. Prime Minister Theresa May need some time to prepare for the tough and time consuming talks. She has already indicated that the she would not rush to trigger Article 50 before the end of this year. However, considering that Canada and U.K. trade negotiations took nearly seven years and have still not been ratified by both parliaments, May’s new task of reaching a sustainable deal seems highly challenging, especially with Boris Johnson and David Davis in her boat.

Last week, the European Commissioner Jean-Claude Juncker announced the appointment of Michel Barnier, an arch-federalist, as Brussels' chief negotiator for the U.K.'s exit talks with the EU.  As European Commissioner for internal markets in 2013, he attacked British Eurosceptics for trying to negotiate a “pick and mix” approach to European financial services regulations while remaining in the EU. As we have already seen some tense competition for the pickings of London’s post Brexit finance sector between Frankfurt and Paris have begun, and it is likely that discussions over access to the single market for financial services will be the core of future negotiations.

 

01 Aug,2016

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