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UK economy: Back in balance? - ING

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Dec 15, 2015.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

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    FXStreet (Delhi) – James Knightley, Senior Economist at ING, notes that after taking a more hawkish line in the summer, the BoE has swung back in the opposite direction in the past couple of months.

    Key Quotes

    “We suspect that this largely reflects weakness in manufacturing data and concern that rising UK interest rate hike expectations (and the belief that the ECB would take more aggressive stimulus action) would see sterling surge. This would further harm international competitiveness and lower import price inflation, making it less likely that inflation would move back in line with target in two years’ time. Indeed, the BoE suggested last month that “more likely than not inflation would remain below 1% into the second half of 2016” and that “the effects of sterling strength and weakness in energy prices would “diminish only gradually”.

    However, the less-aggressive-than-anticipated response from the ECB on 3 December has helped contribute to a 2% decline is sterling’s trade weighted index, of which the euro constitutes nearly half. Furthermore, with the Federal Reserve set to raise interest rates on 16 December and BoE rhetoric successfully de-linking the UK-US synchronised rate hike story, we are becoming a little less upbeat on sterling’s prospects. We suspect the BoE will be of a similar view relative to what potentially could have happened.

    In terms of the domestic economic story, it remains strong outside of manufacturing. 177,000 jobs were created in the three months to September, unemployment is down to 5.3%, wages are rising, confidence is high, house prices are rising rapidly and the service and retail sectors are in good health.

    Consequently, we still feel that the Bank of England is gradually edging towards a rate rise, but it is doing all it can to prevent a rapid rise in sterling. In any case, we have to remember that manufacturing only accounts for 10% of UK economic activity and the remaining 90% is looking in good shape. Consequently, our house view remains that the next move in interest rates will be in May 2016.

    The main risk to this relates to the uncertainty and economic risks from the UK’s referendum on its ongoing EU membership that we think will happen late next year. Given that the response from the President of the European Council, Donald Tusk, to UK PM David Cameron’s letter outlining his “wish list” of reforms wasn’t exactly effusive, there is a lot of work to be done. Cameron has given up getting a deal at the December EU leaders’ summit, so February is the next opportunity, but we think any further delays could prove unsettling for the economy.”
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