Brexit reversal would boost economy

The Organization for Economic Cooperation and Development (OECD) is one of the most influential bodies in global economics. However, its comments yesterday on Brexit appear ill-conceived, impractical and open to accusations of bias.

They commented that basically everything that is wrong with the U.K. economy stems from Brexit and that a second referendum or a change in Government that led to a reversal of the Brexit process would bring about a massive booth to the economy.

This is hardly news since prior to the Brexit referendum, the U.K. was the fastest growing economy in the G7! Whilst stating the obvious, the OECD comments were clearly designed to add further weight to the view that in the short/medium term the U.K. is set for a tough period of economic development.

They went on to say that no deal, which is still considered an option by the U.K.’s negotiating team, would cause havoc, bringing about a major drop in the value of the pound (with its inflationary consequences), a cut in the U.K.’s credit rating and the collapse of inward investment. Sterling’s reaction to these comments was muted having already fallen following comments by MPC members.

MPC Doves Flutter

The newest external member of the Bank of England’s rate setting Monetary Policy Committee gave the first notice of her attitude to the direction monetary policy yesterday. Silvana Tenreyro provided a dovish view of inflation commenting that the current elevated level of price rises was caused by imported inflation and the current weakness of the pound was a temporary phenomenon which would correct in the coming months. This would lead to a fall in inflation and alleviate the need for a rate hike. She also confirmed that her voting intentions would be extremely data dependent.

Her Colleague, Dave Ramsden, the Chief Economic Advisor to the Treasury and newly appointed Deputy Governor of the Bank of England agreed with Ms. Tenreyro. Ramsden said he was not part of the majority of BoE policymakers who believe a rate hike is likely to be needed “in the coming months” because he saw little sign of inflation pressure building in Britain’s labour market.

The pound fell on these comments more than it had when the September inflation data was released. The entirely expected 3% headline inflation rate arrived a month earlier than had been predicted and a further rise, possibly to 3.2% is now predicted for October.

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Trump Favouring Hawkish Fed Chair

The Donald Trump revolving door continues to turn. He is likely to announce his pick as the new Chairman of the Federal Reserve early next month. Despite there being no official announcement, it seems that Janet Yellen, the current incumbent will be cast aside when her term ends in February.  Mrs Yellen has done a solid yet unremarkable job, lacking the wholly unnecessary charisma of her two predecessors Ben Bernanke and Alan Greenspan.

The apparent beneficiary of Trumps favour is John Taylor an economist with Stanford University, the creator of the “Taylor Rule” which if applied to current economic conditions would see the Fed Funds rate higher than its current 1% – 1.25%.

The prospect of a more hawkish Fed chair gave a boost to the dollar although the dollar index remains mired in a narrow range.   The likelihood of a December rate hike remains in the balance as members of the FOMC are concerned over the current level and future path of inflation. The withdrawal of additional measures is likely to tighten monetary policy lessening any inflationary pressures.

The economy is starting to cause concern as recent data releases have missed analyst’s predictions. Payrolls, inflation and retail sales were all below expectation leading to a concern that a tightening could blow the economy off course.

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Alan is a highly experienced banker with an in depth knowledge of Corporate Banking, Treasury and Trade Finance. He has had a varied career in Global markets, Risk management, FX Trading and Sales & Interest Rate Management. He has managed sales teams mentoring his team in both markets and marketing.He has been published in a number of journals and has appeared daily on radio to discuss market movements and events. His first novel was recently published.