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In terms of key data, inflation is lower than the inflation target setting at 0.6% vs. 2%. The BoE expects that the Brexit will push prices of goods and that the CPI target will be reached by the end of 2017. On top of that the BoE Monetary Policy Committee is still expecting decelerated growth for the second half of this year. As a result, we anticipate that the BoE will likely cut rates at the next meeting on 3rd of November in order to provide some fresh stimulus to growth. What is sure at this point is that in most developed countries, massive stimulus and the road towards negative interest rates will continue. The current bounce in UK bond yields is simply due to renewed market expectations on monetary policy success which we are very sceptical about.
Hence, the BoE is very satisfied with the immediate results of its monetary policy and is not really concerned by the upside pressures on UK asset prices due to the current QE. It is clear that the recent positive data is most likely a result of Brexit. The devalued pound is helping the country to increase its attractiveness and the lowering rate is of course stimulating the stock markets as the era of free money continues. The fact is that Brexit provided a fresh boost to the BoE even if it will never be admitted officially.
However, Brexit is still not a complete certainty. As long as article 50 has not been triggered there is no guarantee that this will be the case. For now, the UK has time to plan its exit strategy. Lingering uncertainties on the future of the UK is only beneficial for the BoE. Furthermore, it adds some downside risks to the GBP and it sounds better to keep markets divided around that issue. Throughout the history of the EU, it has not been unknown for democratic decisions to be unobserved as was the case with the Lisbon Treaty in France in 2005, or in Greece last year with the OXO vote.
To conclude, oil prices - which reached $50 and are now back towards $43 - should normally add some inflation pressures. The UK is the largest producer of oil and the second-largest producer of natural gas in the European Union. There are however growing concerns that the oil oversupply is not over yet and that the current rebound in prices might actually be temporary.
Yann Quelenn
Market Analyst
Swissquote Bank
