Comment by Ranko Berich, Monex Europe
The UK general election seems to have made a world of difference in UK business sentiment, which picked up sharply in January after what appears to have been a dismal fourth quarter. Hawks on the Bank of England's Monetary Policy Committee (MPC) now have a powerful argument for holding off on an “insurance” rate cut, and it’s now far more likely rates will not be cut at next week’s meeting.
The detail of the report included a lovely, big increase in new orders, and some of the most optimistic anecdotal reports the survey has seen in recent years. Crucially, survey respondents appear to have been very clear that it was specifically the reduction in political uncertainty following the general election that led to the improvement in business conditions. So on the whole, the data indicate that the UK economy is likely to recover after a very poor fourth quarter, as business investment picks up and consumers continue to spend their real wage increases.
"Sterling is slightly lower on the day, and OIS pricing indicates that fixed income market participants believe next week’s MPC meeting is a coin toss between a 25 basis point “insurance” rate cut and a hold. This 50-50 pricing makes sense given the high amount of uncertainty that still faces UK policymakers after some very poor lagged economic data over the past couple of weeks.
"The case for sunlit uplands in the UK economy from here on out is far from watertight. Q4 showed us how badly political uncertainty can freeze economic activity. Sajid Javid has been adamant recently that there will be no regulatory alignment with the EU while the clock for the end of the transition period ticks on. Should political uncertainty once again begin to mount, the nascent recovery in the UK economy and sterling may end up being a false dawn."