UK: Expectations for BoE easing continue to build - MUFG

Lee Hardman, Currency Analyst at MUFG, notes that the pound has weakened in the Asian trading undermined by comments from hawkish MPC member Weale who has stated that he has changed his mind and now favours providing immediate stimulus for the UK economy.

Key Quotes

“He told the FT that the weak PMI surveys for July were “very material” for next week’s BoE policy decision. The sharp drop in confidence was also evident yesterday in the release of the latest CBI survey which revealed business optimism plunged by 42 points to -47 in July reaching its lowest level since the low from the global financial crisis in January 2009. 

Heightened uncertainty following the Brexit vote has provided a significant initial negative shock to business confidence in the UK. It is helping to encourage speculation that the UK could adopt a compromise option when leaving the EU whereby it could enter the European Economic Area for a transition period, which has been described as a potential “safe harbour” where it could work out a bespoke long-term solution. The Adam Smith Institute has proposed that participation could be a “compromise position for the short to medium term” by setting a time limit when it would review its place in the EEA.

The advantages for the UK would be that it would formally leave the EU honouring the referendum decision, and protect access to the single market over the medium-term. Once inside the EEA, the UK and EU would then have plenty of time to try to agree a bespoke long-term trade deal which couldn’t be concluded within the two-year Article 50 time frame. It would also provide more time for the UK to reach trade agreement with non-EU countries which could begin once outside of the EU.

However, the ability of the UK to control the movement of labour would still be limited within the EEA although greater than within the EU. It could prove an attractive transitional arrangement for the EU as well by helping to minimise economic disruption. There is no indication that government policy is heading in this direction but it would likely be looked upon favourably if adopted in a timely manner which would provide support for the pound by helping to ease uncertainty.”