MPC facing Rate Hike Dilemma

Carney’s Fears being realized

Since the Brexit referendum result, Bank of England Governor, Mark Carney, has continually spoken of his concerns over a slowing U.K. economy. His view has been that the rise in inflation to close to 3% has been due to the fall in the pound over the past year.

He had been vocal in his opinion that there is no need for a rate hike to control inflation. As recently as June 20th in a speech to the City, he spoke of mixed signals on business investment and consumer spending as being his major concerns.

He then had an apparent change of heart following a speech from his Chief Economist in which he said he was considering voting in favour of a hike at the next meeting on August 3rd.

Data released yesterday seemed to back the Governor’s original view as consumer spending slowed and business investment intentions were scaled back.

Credit card data from Visa showed that year on year spending fell by 0.3% in June. A fall in real wage growth is capping spending which had its weakest quarter in four years.

Sterling was unchanged as the market awaits new fresh direction as the summer lull approaches.

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Politics and Economy drive business investment slowdown

Accounting Firm DeLoitte recently surveyed Chief Financial Officers over their plans for investment in their businesses. Their responses showed that confidence in the U.K. both politically and economically has slumped in the second quarter.

They are particularly concerned over what Brexit will actually mean to U.K. business. Three months on from the triggering of article 50 there is no clear policy emerging from Government.

The inconclusive election result which has brought a severe weakening of a Government that was seemingly business friendly has added to concerns.

72% of respondents to the survey felt that the U.K.’s business environment would be worse following Brexit with only 8% seeing any improvement. Concerns over the Government’s ability to quickly establish trade deals were also evident. The pledge by President Trump at G20 to ensure that a trade deal between the U.K. and U.S would happen quickly will have brought some relief.

This survey has, in the past, mirrored the Bank of England’s own findings. The MPC will face extremely tough decisions in trying to plot a path for monetary policy as not only current intentions but future plans are reined in.

Euro Strength set to continue

Six months ago, Mario Draghi the ECB President must have had major concerns over the political and economic direction that the EU was going to take over the first half of 2017. There was a real threat of the continuation of nationalist election results in France and The Netherlands and concerns over a widening gulf between the performance of economies within the Eurozone.

As he starts his summer break, Sr. Draghi can look back on a job well done. Although he cannot claim any credit for the victories of Macron and Rutte, his management of the return to normality for monetary policy has been perfect. The ECB can now start to withdraw monetary support by reducing the Asset Purchase Scheme and look at raising rates as and when they feel that inflation needs to be controlled.

The single currency has risen by close to 10% despite the widening of the interest rate differential between the U.S. and Eurozone. Further gains targeting 1.1500 are not out of the question but it is against the pound that the Euro could make serious inroads.

It now seems likely that the 0.9000 level will be tested and there are analysts commenting that, dependent upon the Brexit negotiations, a long-term target could be parity.

For now, the ECB can enjoy its summer holidays in relative peace.