Brexit dilemma for the old lady
The latest round of Brexit negotiations have run into a brick wall again it seems, with a state of ‘deadlock’ announced yesterday by the EU chief negotiator, Michel Barnier.
The simple truth is that the EU wants us to pay our bill before they agree to any concessions, and the UK doesn’t want to pay until we have assurances – Assurances that are clearly not forthcoming.
Now we have a continuation of the impasse that has dogged any progress for many weeks now, and the reaction in the currency markets was to slam the pound lower immediately with the GBPUSD dropping more than a cent in very short order.
A similar converse reaction has played out in the EURGBP, which pushed back above 0.9000 for the first time in a month.
Indeed, the prospect of a ‘hard Brexit’ has instantly become more elevated again, and unfortunately, this latest news merely underlines everything I said back in December 2016 – that there is no deal. I hate to repeat this, but developments throughout this year can lead me to no other conclusion.
I wished it were otherwise, but it looks increasingly like the case – or at best the odds – of such have certainly shortened markedly as of yesterday.
Against this backdrop the Bank of England has to make a decision on the 2nd November. A decision that many still expect will result in them raising the base rate by at least 0.25%.
Of course, from the Bank’s perspective, an interest rate rise is warranted given the current levels of inflation. This argument is further endorsed by the pound falling back from its most recent highs again.
Problem is, the economic outlook is no less certain than it has been all year; the housing market remains vulnerable, and consumer debt continues to hover at record levels.
So the question now is, can the Bank afford to move the base rate much higher right now?
Damned if they do and damned if they don’t is the answer, and the real concern for the MPC is if the currency doesn’t lift as a result of an interest rate increase, then it will surely only fall further without one.
Furthermore, they may find themselves having to deliver a series of hikes – none of which are guaranteed to push the currency much higher.
So the Bank is in dangerous territory here – ala shades of 1992 if anyone out there remembers that fiasco?
Now surely the MPC are more than aware of the risks here, and I certainly don’t envy their task because any interest rate increases will clearly be ‘defensive’.
I am on record as far back as 2014 in respect of this very matter, and I’ll tell you the same now as I said back then; Such defensive rate increases are truly the stuff that currency crisis are made of.
For whatever its worth, if it was me in the decision making seat, I would continue to look through the problem of rising prices for now out of fear of actually exasperating the problem by trying to defend the currency.
So just let it go guys. It’s a risky approach, but the alternative is far worse! History alone tells us that and talking of History; the 30th anniversary of ‘Black Monday’ looms large!