Bank of England Strikes More Hawkish Tone

Analisi Giornaliera - 03/02/2017

UK Central Bank Upgrades Growth and Inflation Outlooks While Maintaining Flexible Stance

The Bank of England left the benchmark interest rate unchanged at 0.25% while leaving quantitative easing on hold at £435 billion in its latest monetary policy decision, matching market expectations. However, despite holding firm, the statements and projections displayed a more hawkish outlook even with the potential implications of the impending Brexit negotiations.

UK’s Key Rate Remains Stable

In a widely anticipated move, the Bank of England voted to keep interest rates on hold at 0.25% while citing the positive outlook for inflation. According to the Central Bank, inflation is set to return to 2.00% in February before trending above the level in the subsequent months.

Furthermore, in a more hawkish sign for the economy, the BoE upgraded its projections for growth for 2017 and 2018, with the Monetary Policy Committee forecasting 2.00% GDP growth for this calendar year before retreating to 1.60% in 2018.

While higher inflation may be tolerated in the meantime, should it continue to rise beyond levels deemed comfortable, the MPC has indicated that they could adjust policy depending on how prices evolve over the medium-term.

Despite the more hawkish viewpoint, the Brexit affirmation vote combined with the Bank of England viewpoint drove the Pound 100 pips lower against the Euro before recovering modestly.

Oil Prices Climb as US Prepares Fresh Sanctions Against Iran

Following a ballistic missile test conducted earlier in the week by the Islamic Republic in an act of direct defiance of the international community, the Trump Administration is now preparing a set of fresh sanctions to be directed against Iran. Although the OPEC deal is helping to alleviate bloated stockpiles of crude oil across the globe, a move to restrict Iranian exports could very well be a positive development for OPEC and non-OPEC producers.

These exporters would be set to benefit from the rise in prices should 1 million barrels per day of Iranian output be taken off the table by a fresh round of economic sanctions in response to the missile test.

While the exact form of the sanctions is still unclear, OPEC continues to make progress, with Russia reporting a 1.400 million bpd fall in output since the outset of 2017, sending WTI futures higher.

Turkish Inflation Climbs to One-Year High

With conditions in Turkey continuing to worsen from an economic standpoint, the latest jump in inflation highlights the crux of the problem facing the Central Bank. Consumer prices in Turkey climbed 9.22% year over year through the end of January, with the Lira a predominant driver of the acceleration higher in prices.

Considering President Recep Tayyip Erdogan’s adamant stance that the Central Bank should not raise rates, the institution is largely powerless to temper inflation and prevent the Lira’s continued descent. As a result, a situation of stagflation which is traditionally defined as high unemployment and high inflation is emerging across the economy.

On a monthly basis, the pressure higher on prices was significant, climbing 2.46% which is likely to mean a sustained rise in the measure over the coming months. With no imminent tightening expected from the Central Bank, the EURTRY is pushing back towards record highs.

Chinese Factory Growth Comes in Below Estimates

In another sign that economic activity in China is cooling, the latest Caixin Manufacturing Purchasing Managers’ Index printed at 51.0 in January compared to 51.9 in December. Although the indicator remains in expansionary territory and marked a 7^th-straight month of growth, the figure came in well shy of the consensus estimate of 51.8.

While export orders rose rapidly during the period, largely thanks to a cheaper Yuan, new orders and output growth decelerated, potentially warning of weakness down the road. Furthermore, the figure highlights the challenges facing policymakers as they work to maintain growth through a combination of fiscal and monetary stimulus. With inflation rising, the move to tighten interest rates overnight by the People’s Bank of China may be the first of many more moves to prevent inflation from running to hot. Nevertheless, despite tightening conditions, the Yuan is slightly weaker against the dollar heading into the European session.