Super Thursday

3 November, 2016

When the Bank of England presented its last Inflation Reports, the dust was still settling from the UK’s decision to vote to leave the EU. The Bank cut interest rates and slashed their growth forecast for the coming year. Three months later, they view a very different picture. The economy has performed better than they expected, but the uncertainty remain regarding the road to Brexit and this will be emphasised in today’s report and the Governors press conference. The bigger change has been the currency, which has fallen a further 7% against the dollar since the August Report. That will see headline inflation over-shooting the Bank’s 2% inflation goal on their forecast horizon. The Bank will no doubt stress the temporary nature of this over-shoot, so rates will be indicated as being on hold for the time being. Bank in August, the majority of the MPC anticipated a further cut in rates this year, which is not likely to be seen given the better performance of the economy and deterioration in the inflation outlook. Sterling has been performing well over the past few sessions, so whilst may be holding up now, low rates and higher inflation with low demand is not a positive longer-term outlook.

Elsewhere, the FOMC meeting last night saw marginal changes in the statement with one less member voting for higher rates, in contrast to the three dissenters seen in September. The passing of the meeting, means that the residual risk for a hike that was being priced into interest rates markets has now been pushed into December, so the pricing there is not nearly an 80% chance for a move higher. The dollar was little moved, but remains softer on the back of the latest US presidential rate developments, the dollar down nearly 2% over the past eight trading sessions. Equities have also been softening over the past few sessions, with measures of volatility increasing sharply has the outcome of the presidential race casts a cloud of uncertainty over the market.

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