11/10/2017 - Scope For BOE Interest Rate Hike Remains

GBP

Data released yesterday showed that there is still scope for the Bank of England to raise interest rates during their next meeting on November 2nd despite signs of weakness in the UK economy over the past month.

Budget forecasters gave a gloomy medium-term outlook yesterday, potentially leaving Chancellor Philip Hammond with less leeway to counter any impact on the UK economy resulting from Brexit. A weaker economy leaving the UK government coffers with less tax revenue.

The downbeat sentiment comes after the run of poor economic data that Britain saw during the earlier part of last week. This contrasts to the situation with some of Britain’s closest trading partners in the EU such as Germany and Italy, who’s export volumes and industrial sectors have grown much faster than expected in the third quarter.

However analysts still believe that the resilience of the economy has been undermined as factory output in the UK grew 2.8% year-on-year in July and August, the fastest rate in six months. In addition, there has also been some expansion in the construction sector.

Despite signs of slack in the economy, policymakers at the Bank of England are widely expected to maintain their hawkish attitude from last month’s meeting and many still seem to believe that the inflationary pressures that have arisen from the weaker pound following the Brexit vote need to be critically addressed.

European council president Tusk yesterday revealed that the EU is currently negotiating the terms of Britain’s departure from the bloc in good faith and is not planning for a hard Brexit in which there is no agreement.

Although the UK is keen to kick-start the Brexit negotiations as soon as possible the EU has insisted that it will not discuss the terms of future trade arrangements until divorce issues such as citizens’ rights, the Irish border and the size of the “Brexit Bill” are addressed.

EU negotiator Michel Barnier later warned the press that Brexit was “not a game” after his lunch with his British counterpart David Davis. His comments come a day after those of Prime Minister Theresa May who on Monday told the EU that the “ball is in their court.”

The fifth round of the talks is the last before EU leaders meet at a summit on 19 October to decide whether enough progress has been made to discuss the UK’s future relationship with the bloc. Although this week’s four day talks have got off to a slow start, Barnier and Davis are expected to give a press conference on Thursday to reveal what progress has been made if any.

Key Announcements

19:00 – USD – FOMC Meeting Minutes