UK Growth Raises Prospect of Earlier Tightening

Andamento del mercato - 25/10/2017

Preliminary third quarter gross domestic product figures published by the United Kingdom Office for National Statistics earlier in the session add to a series of positive developments facing the Bank of England.  Quarterly growth managed to experience a surprising pickup to 0.40% compared to the consensus estimate of 0.30% for the period.  Year over year, expansion stayed on hold at 1.50%, topping forecasts anticipating a deceleration to 1.40% for the period.

Even with the worrisome Brexit backdrop, the economy continues to fire on all cylinders as evidenced by the advance in both services and manufacturing activities during the period. Overall, growth could be considered broad-based, with the only weak component of the report surrounding construction activities, which experienced -0.70% decline in output, extending the -0.50% contraction reported during the second quarter. Considering the rapidly approaching November Monetary Policy Committee decision being held the following Thursday, accelerated economic activity bodes well for the possibility of tighter interest rates.

While the Bank of England under the stewardship of Governor Mark Carney has long been wary of the potential implications of Brexit, recent data points scream for a degree of monetary tightening.  Apart from the need to alleviate pressure from inflation, the erosion of household income from price gains outpacing wage growth could be a red flag for growth in subsequent periods.  Even though Carney is assuredly concerned that higher interest rates could impact the rate of growth, the case for a 25-basis point rate increase grows with each passing week.

Forecasts are currently anticipating no change in interest rates as early as next week, but there is the distinct possibility of a hint of a singular hike before the end of the year.  Taking into account annualized inflation trending above the Central Bank’s 2.00% price stability target for 8-straight months, the institution may have no choice but to act.  Already the Pound is reacting to the growing likelihood of policy tightening, with GBPUSD up over 100 pips on the session after encountering resistance near 1.3265.


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