Minutes to make interesting reading
The Monetary Policy Committee of the Bank of England at its monthly meeting yesterday took the only course of action available to it to provide a boost to Sterling.
Having voted 7-2 to leave rates unchanged, it seems more than a little incongruous to then warn of a rate hike as soon as the November meeting.
Following the initial vote Sterling fell as disappointment that a further MPC member hadn’t shifted his stance to vote in favour of a hike. It was considered possible that Andrew Haldane, the Central Bank’s Chief Economist would vote for a hike given his more hawkish comments recently. Governor Mark Carney commented that economic activity was in line with the Bank’s expectations and inflation is likely to peak at around 3% next month.
The pound gained 1% on the day versus the common currency and breached the 1.3400 level against the dollar.
The members of the MPC, still concerned about Brexit and its effect on economic activity, decided that some action had to be taken following the data releases this week. The major concern is the widening gap between wages and prices and since they are unable to affect the incomes side of the domestic balance sheet decided that trying to control the expense side was the only alternative available.
Pyongyang returns to life
Following a stinging speech in which he promised to “sink Japan and turn American Cities to ash with a nuclear attack” in retaliation for their support for renewed and tougher U.N. sanctions, North Korean Leader Kim Jong-un launched another ballistic missile test which flew over Japan and landed in the sea nearby. The reaction from Washington, Seoul and Tokyo has so far been muted although Japanese Prime Minister Abe commented that such provocation cannot be allowed to continue.
The only thing holding Donald Trump back from displaying American firepower is the reaction of Beijing and, to a certain extent, Moscow.
The financial markets have, so far, barely reacted and it is likely that an escalation would be necessary to encourage a flight to safe haven currencies.
The Yen has been in the doldrums, falling against the other G7 currencies. It has fallen by close to 6% against the pound since late August and versus the dollar is back above 110.00. Next week there are rate setting meetings in both the U.S. and Japan. At best the gap will remain constant but since monetary policy is on opposite paths, purely from an interest rate perspective the JPY should weaken further. However, considering the number of influences on the dollar anything can happen, although the North Korean situation needs to deteriorate further to drive a further Yen rally.
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Brexit talks delayed as May expected to make rallying call
The recommencement of Brexit negotiations was due on Monday but have been delayed for a week. Chancellor The delay in the talks was apparently to allow both sides time for further consultation to enable binding decisions to be made at these, the fourth round.
However, it is understood that Prime Minister Theresa May will be making a speech next Thursday or Friday at which she will reveal a major policy change. Philip Hammond also announced that the Government was very close to agreement with Brussels over the rights of EU citizens remaining in the U.K. following departure from the EU.
May will be “walking a tightrope over what she can actually promise. Leaning towards a soft Brexit could anger backbench Eurosceptic MPs while a harder stance would bring further problems with Brussels. since the negotiations are at a delicate stage.
Since the original announcement that Mrs May was planning an “important intervention” was made by Guy Verhofstadt the European Parliament’s Brexit chief and the speech will be in a European City it is probable that it will be a positive for Brussels.
It is difficult to say if there has been any reaction from Sterling since it is already in the throes of a correction driven by the MPC.
