BOE Sitting on the fence: UK one of the fastest growing G10 economies - Rabobank

Jane Foley, Senior FX Strategist at Rabobank, noted, "In 2016 the UK was one of the fastest growing G10 economies. BoE Governor Carney commented in January that UK households currently appear to be entirely looking through Brexit-related uncertainties. Ultimately, however, the Bank and the majority of forecasters expect that imported inflation (triggered by GBP’s precipitous fall last year) will begin to weigh on real incomes and slow consumption growth. The Bank expects that this will increase the uncertainty which is restraining investment. The result is that growth is forecast by the Bank to drop below recent averages. While this reasoning implies a dovish tone, Carney has made clear that there is a limit to how much inflation the MPC is prepared to look through. As the MPC watches carefully the development of second-round price pressures, we expect policy makers to remain firmly on the fence, potentially well in 2018." 

Key Quotes
"Q4 UK GDP registered a better than expected 0.6% q/q. According to the Office of National Statistics there was “a strong contribution from consumer focussed industries such as retail sales and travel agency services”. There is strong evidence that the UK consumer has become increasingly reliant on the ‘never-never’ to fund his purchases." 

"Latest consumer credit data from the BoE showed a 10.8% y/y surge in unsecured borrowing in November, with the monthly rise recording its fastest pace for more than 11 years. The strength of consumption in the months following the June referendum on EU membership is counter to the expectations of many forecasters including the BoE."

"As a consequence of political uncertainty surrounding the impact of Brexit on the UK economy, it was widely assumed that the UK consumer would increase his savings and spend less. That said, official retail sales data for December posted a shockingly poor fall of -1.9% m/m." 

"The BoE has claimed some of the responsibility for the fact that the UK remains one of the fastest growing G10 economies. In a speech in mid-January Governor Carney referred to the MPC’s decision to reduce the Bank rate by 25 bps and announce GBP70 bln of asset purchases last August. He remarked that “opting not to provide monetary stimulus would have meant, in all likelihood, inflation around the target at the two-year point of the forecast, but an output gap of some 1½%, implying around 1/4 million lost jobs.”

"While the Bank’s forecast for CPI inflation softened a little in December, the strength of the official December release surprised the market. December CPI inflation rose by a faster than expected 1.6% y/y on the back of rising food and transport costs."

"While the market will be keeping an eye on the progress of the Brexit bill through parliament, PM May’s packed ‘to do’ list offers ample scope for diversion. UK PM May’s meeting with President Trump has been billed as a primer to creating new trade deal between the US and the UK. GBP has been boosted on the hope that such a deal will help offset some of the impact of the UK’s loss of free access to EU single market after Brexit." 

GBP/USD inter-markets: Brexit over-optimism?