Dilemma For Bank Of England Over Whether To Raise Rates

Bank of England policymakers have been faced with a dilemma during their deliberations over whether to increase interest rates, the outcome of which is due later Thursday.

The consensus in financial markets is that the nine-member Monetary Policy Committee will opt against raising the bank’s main interest rate from the record low of 0.25 percent.

Though above-target inflation is likely to prompt at least two on the panel to vote for a hike, the majority are expected to opt for no change in light of the slowdown in Britain’s economic growth and uncertainty over the country’s exit from the European Union.

Economic figures this week have highlighted the dilemma. While inflation is running at 2.9 percent, above the bank’s 2 percent target, households are facing a squeeze on their incomes.

British Inflation Unexpectedly Holds Steady In July

Official figures show that consumer price inflation in Britain held steady in July at an annual rate of 2.6 percent.

The reading from the Office for National Statistics was slightly better than anticipated. The consensus of economists was a modest uptick to 2.7 percent.

Still, Tuesday’s figure keeps inflation above the Bank of England’s target of 2 percent, which has stoked speculation that interest rates may rise in coming months.

Inflation in Britain has risen sharply over the past year since the country voted to leave the European Union, a decision that prompted a big drop in the value of the pound, which raised the price of imported goods.

Inflation also continues to outstrip wage increases, meaning living standards continue to fall.

Impact Of The Pound’s Drop Around The World

The drop in the British currency on Friday will have an impact not just on the local economy but also on companies from around the world doing business in the country as well as tourists and shoppers.

The pound fell as much as three cents against the dollar, from $1.2950 to $1.2635, after the British election produced no clear winner. By Friday, it had recovered slightly to $1.2755.

The drop is not as dramatic as the near 17-cent slide — from $1.50 to $1.33 — that the currency endured after Britain voted last year to leave the European Union, but it is likely to be felt broadly if it is sustained.

Here’s a look at the main effects it could have.


A drop in the pound makes it cheaper for people holding other currencies to visit Britain — and shop there. Britain has already seen a surge in tourism since the pound dropped on the Brexit vote last year. A record 37.6 million people visited Britain last year, spending 22.5 billion pounds ($29 billion), with visits from the U.S. up more than 10 percent. It’s not just the stay that’s cheaper. London is one of the biggest destinations for international shopping, particularly luxury goods, and the weaker pound has helped sales. Companies like Burberry have credited tourist shopping for helping to boost sales.


The drop in the pound will help lower the cost of Britain’s exports around the world. Retailers tend to have contracts on imports that span months, if not years, to avoid the uncertainties of fluctuating currencies. So don’t expect the price of a bottle of Scotch whisky to fall overnight. But in the longer-term, as the supply contracts are renegotiated, a weaker pound will, all other things being equal, reduce the cost of British goods sold around the world.


The opposite is true for the British: imports for them become more expensive as the pound drops. Some things, like oil and car fuel, which are priced internationally in dollars, will reflect the pound’s drop quickly by edging up. Other things, like foreign cars and food, could take longer as supply contracts get renewed. Since the pound’s big fall on last year’s Brexit vote, inflation has risen faster than wages across Britain, eroding people’s standard of living. Higher inflation also eats away at the benefits exporters will get from the lower pound.


British companies become cheaper takeover targets and will find it more expensive to buy foreign companies. Since last year’s sharp fall in the pound, British companies have been approached and been taken over. Software company Arm Holdings was taken over by Japan’s Softbank for $32 billion. More recently, consumer goods giant Unilever has rebuffed a $143 billion approach by Kraft Heinz.


The British currency’s drop will have an automatic impact on company earnings. British multinationals like BP or Shell will see their revenues made in other countries become more valuable when repatriated and translated back into pounds. For non-British companies, their revenues in Britain will take a hit. Some companies have raised their prices or reduced the amount of goods sold in Britain to make up for the decline in local revenue. The issue was highlighted when Mondelez International, based in Deerfield, Illinois, last year reduced the size of some of its Toblerone chocolate bars in Britain.

Triggering Brexit Tomorrow

Tomorrow is likely to go down in history. Prime Minister Theresa May will trigger Article 50 and officially begin the Brexit process.

Here’s everything you need to know.

What is Article 50?

Article 50 refers to the 264-word clause of the Treaty on European Union (often referred to by the marginally more memorable moniker, the Lisbon Treaty) allowing countries to leave the European Union (EU).

Any country can leave the union subject to “its own constitutional requirements”.

What will happen tomorrow?

The cabinet is expected to meet tomorrow morning rather than their usual Tuesday meeting to allow for May’s top ministers to discuss the Article 50 notification.

Then it is expected the Prime Minister will face her standard Wednesday grilling in the House of Commons from midday, with May expected to make a statement following Prime Minister’s Questions.

Meanwhile, the notification will take place around the same time.

So how will we notify?

There is no stipulation in the article for the form of the notification, but presumably a cheeky text message would not meet the standard for statecraft required.

Instead, the UK’s ambassador to the EU, Sir Tim Barrow, will hand-deliver the notification letter to the European Council and its president, Donald Tusk. The letter will be signed by the Prime Minister.

What will be in the letter?

We don’t know yet, but we will have our first chance to see the historic document later in the afternoon.

How long will negotiations last?

From the notification date the UK will have two years to negotiate the terms of exit.

The negotiations will follow the path set down by another article in a connected Treaty. The next bit of obscure constitutional jargon we will all need is Article 218(3) of the Treaty on the Functioning of the European Union.

This one is less important though: it just says the European Council must authorise the opening of negotiations and appoint a negotiator.

When will the UK officially leave the EU?

If this process is followed correctly the UK will have left the EU officially by the start of April 2019.

Whether this happens in practice might be rather more complicated. The vast body of EU law and regulations (not to mention the institutions which do the regulating) will probably take a significant amount of time to duplicate or remove.

Transitional deals around the UK’s leaving process have been called for in some quarters of the business community, although so far we have no detail on what the government’s priorities will be.

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How is 2017 Going So Far?

Brexit, Trump, US interest rates… Just some of the recent news items moving Forex markets.

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Dollar Mixed Ahead of Trump Inauguration

Donald J. Trump will become the 45th President of the United States when he is sworn into office tomorrow. Markets will be following the event as his transition team has promised to deliver executive actions from day one. Here is a quick schedule of the Inauguration:

9:30 am EST- Inauguration ceremony begins
11:30 am EST- Opening remarks.
Noon – Trump will recite the oath of office. Afterward, Trump will deliver his inaugural address.
12:30 EST – Ceremony ends.
3 pm to 5 pm EST – Inaugural parade.
7 pm to 11pm EST – Three official inaugural balls.

The U.S. dollar was mixed during the Thursday trading session ahead of the big event. The NAFTA currencies, CAD and MXN had a volatile session following comments from earlier in the week about the renegotiation of the trade agreement. The Mexican peso had been a focus of Trump, but the CAD was quickly caught in a downtrend losing about 0.40 percent on Thursday.

Trump has not changed much since his combative persona during the primaries and the election which he eventually won. His first 100 days in office are full of uncertainties for all asset classes which portents higher volatility as more of his policies are finally revealed