Article / 04 August 2017 at 11:40 GMT

It's the politics, stupid!

Head of Trading / The ECU Group plc
United Kingdom
  • BoE kept asset purchase facility and rates unchanged on Thursday
  • Two BoE MPC members dissented in favour of a 0.25 point rate rise
  • BoE marginally lowered its 2017-18 GDP growth projections 
  • GBP and UK rates were hit by BoE spotlighting significance of Brexit uncertainty 
  • Political shenanigans in US growing increasingly audible
  • Chances of a capitulative selloff in the USD are rising
London with EU and UK flags
 The Bank of England governor made no secret of the negative 
economic implications of Brexit uncertainty. Photo: Shutterstock

By Neil Staines

“The secret of getting ahead is getting started” — 
Mark Twain

As expected, the Bank of England on Thursday left the asset purchase facility (APF) unchanged with a unanimous vote and kept interest rates steady, with two members (Saunders and McCafferty) dissenting in favour of a 25-basis-points rate rise. 

The debate among forecasters was whether BoE chief economist Andy Haldane would vote for a rate rise to keep the split unchanged from the June meeting (5-3) after the departure of Kristen Forbes’s dissenting voice. While the analysis of the split is interesting, it is not the core driver of GBP or UK interest rates at the current juncture.

The quarterly inflation report (QIR), whose simultaneous release mad BoE's put the "super" in the BoE's "Super Thursday", brought marginal reductions to the monetary policy committee’s growth projections (cutting 2017 GDP forecast to 1.7% from 1.9% and to 1.6% in 2018 from 1.7%). It also lowered the bank's forecasts for wage growth in 2018 to 3.0% from 3.5% previously. However, in our view, this is not the core driver of GBP or UK interest rates at the current juncture either. The bank’s updated growth forecasts are still above the central market expectation.

Furthermore, the QIR analysis lowered the bank’s forecast for the potential (or trend) growth rate of the UK economy, which in turn led to the statement that, if the economy progresses in line with BoE expectations, then the bank “rate may need to rise more than markets currently imply” (as a function of above-trend growth) — currently around two 25bps rate rises over the next three years, starting in the third quarter of 2018.

However, from our perspective, the negative reaction of the GBP and UK  rate markets to the "Super Thursday" news resulted specifically from the bank pointing out the negative connotations of the uncertainty of the Brexit negotiations and, in many respects, the relatively unknown direction of the talks. BoE governor Mark Carney was clear in emphasising that “growth remains sluggish in the near term”, specifically due to lower business investment due to Brexit uncertainty and its negative impact on wage growth and productivity growth.

In contrast with this negative view of the UK's near-term growth prospects, the National Institute for Economic Social Research, NIESR said earlier in the week that “Britain’s economy will surge back to life in the next six months following its slow start this year”. The NIESR said “a boom in exports after the fall in the pound and a return to bumper wage rises next year would be enough to increase GDP growth to almost 2% and convince the central bank to increase the cost of borrowing”.

“It may be the biggest problem that the modern world has ever faced… This will create a nightmare for every area of life, in every region... ”  — Gary North

As firms and individuals try to understand and calibrate the implications of Brexit, it is perhaps increasingly important that the government play a role in reducing uncertainty and countering fear wherever possible. The above quote, from The Economist, perhaps sums up the potential for negativity of uncertainty. The author of the quote, however, was not fearful of Brexit, but of the "Millennium bug"!

The key point here is that the main destabiliser to business investment, and therefore the UK economy, is the uncertainty that the government has generated in its negotiations, strategy, and communication. The "marketing" of the Brexit plan has been nothing short of shambolic, and it has led to a cautionary delay in business investment that has, in turn, weakened the government position and promoted a fear that exaggerates the negative and ignores the positive. Perhaps the PM needs new PR?

“It wasn't a lie, it was ineptitude with insufficient cover” — Don Draper, Mad Men

On a wider note, the political shenanigans in the US are becoming increasingly audible, as is the concern in financial markets, with one notable outlier. Over recent months, the inadequacies of the Trump administration have eradicated expectations of US fiscal stimulus from growth and inflation forecasts, which has lowered interest rate expectations (flattening the curve) and dented the USD. In recent weeks, political worries have grown further, culminating in last night’s announcement that US special counsel Robert Mueller will impanel a grand jury in Washington as part of the Russia probe.

Ironically, the exception to the heightened concern (and indeed volatility) is the US equity market. It is likely that the USD's slide is helping global profits. There is a point, however, where the political backdrop becomes sufficiently weak or uncertain to undermine the stock market. It seems, however, we are not there yet.

From the perspective of the USD, we are increasingly convinced that the prospects of a capitulative selloff in the USD are rising, and failure to find strength in some aspect of this afternoon’s US employment report could be the trigger.

The White House
 The shenanigans in Washington could be entering a new phase. Photo: Shutterstock 

— Edited by John Acher

Neil Staines is head of trading at The ECU Group


The Saxo Bank Group entities each provide execution-only service and access to permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on or as a result of the use of the Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. When trading through your contracting Saxo Bank Group entity will be the counterparty to any trading entered into by you. does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of ourtrading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws. Please read our disclaimers:
- Notification on Non-Independent Invetment Research
- Full disclaimer

Check your inbox for a mail from us to fully activate your profile. No mail? Have us re-send your verification mail