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Screaming for a Deal
In its August 2 MPC meeting, the Bank of England held its policy rate fixed at 0.75 percent keeping
it stable for a year after it was hiked by 25 basis points in August 2018. Since then a lot has
changed. Hope of an EU withdrawal deal has translated into a real risk of hard Brexit; US – China
trade wars have turned uglier; global growth has softened; central banks have either delivered rate
cuts or have hinted at one notwithstanding the already negative deposit rate. Subsequently, the
yield curve from the forwards and OIS had priced in a 25 bps rate cut.
BoE, in its August 2019 inflation report attributed low yields to high demand of safer assets in a
slowing global economy alongside Brexit. The rate cut was not delivered. The bank perhaps wants
to keep more ammunition for a no-deal EU withdrawal, which is not factored explicitly into its
economic forecast models.
GDP growth in Q2, 2019 is expected to be flat after growing 0.5% in Q1. The 2019 GDP forecast
for growth is revised downwards to 1.3% from previously 1.5%. The 2020 forecast is also revised
down from 1.6% to 1.3%.
With the Prime Minister Johnson disagreeing to any sort of Irish backstop and the EU insisting on
it, a smooth Brexit assumption appears weak. Any forecasts on such assumptions could therefore
be far from the truth. The bank has noted that the probability of a hard Brexit, as implied through
Office for Budget Responsibility (OBR), in its July 2019 Fiscal Risk Report uses hard Brexit only as
a stress-test scenario, sending the UK into recession with even 2020 real GDP estimates down by
2%. While the August MPC minutes and inflation report remains silent on no-deal, no-transition
Brexit, the BoE Chairman Mark Carney, in an interview to the BBC has alluded to very big and
highly profitable industries suddenly becoming uneconomical if such a scenario was allowed to
In the meanwhile, retail segment has also demonstrated stress with BRC-KPMG July report
pointing to 3 month average sales falling to 0.1% and the 12 month sales declining to as low as
0.5%. Though the July numbers were expected to be low due to a higher base effect, the moving
averages weakness is a reason to worry.
Most quarterly trading updates from the UK retailers are mentioning the subdued demand. While
many UK retailers are trying to find a silver lining in their trading statements, Sainsbury plc, the
second largest UK retailer, is more upfront in clearly communicating that its total sales declined by
1.2 percent as grocery sales contracted by 0.5% and general merchandise and clothing by 3.1 and
The glut in retail spending comes alongside falling permanent and temporary staffing as it fell for
the sixth time in past seven months in July. The UK Jobs report, by Markit/REC released on August
8th, notes that the availability of workers continued to remain low, pushing the starting salary higher
although at a softer pace. This is expected to further increase the cost pressure in wake of low
While the global markets are all sluggish, the idiosyncrasies for the UK stem from the unknowns
around Brexit and not as much from the Brexit itself. There is an urgent need to know whether or
not will there be a transition period in the exit process. As soon as the much needed transition
period starts to appear, the consumer confidence can be expected to bounce back providing
investment opportunity for healthy businesses.
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