Analysts at Rabobank explain that the ECB is not the only central bank that seems to be following the exchange rate closely, as Bank of England representative Michael Sanders reminded the markets that the central bank is not “indifferent” to depreciating sterling. “His comments coincided with the drop in the trade-weighted sterling index to levels close to those to which the index fell on similar observations by Mark Carney in October 2016. Sanders outlined his attitude to raising interest rates, arguing that inflation is likely to exceed 3% in the coming month amid rising domestic price pressures. In his opinion, there is evidence that the labor market “is becoming increasingly rigid.” Despite the fact that he did not shy away from the risks that Brexit carries for the British economy, Sanders expressed confidence that the slowdown in consumer spending could be offset by a sharp increase in exports and a modest recovery in private investment.
We remain of the opinion that the Bank of England is likely to keep interest rates unchanged, at least until the end of 2018, as the prevailing uncertainty caused by Brexit will affect personal consumption and investment. Nevertheless, another sharp drop in the value of sterling will be an inflationary factor and will increase the risk of an early rate hike from the Bank of England.
It stands to reason that negotiations on Brexit are the main driving factor for the pound sterling. The comments of the EU’s chief negotiator Michel Barnier were far from encouraging on this front. After the third round of negotiations between the EU and Britain, Barnier said that there was no “decisive” progress. The Brexit agreement (estimated at 100 billion euros) and the transitional agreement are the main obstacles to the conclusion of the final trade agreement on both sides’ way. More rounds of negotiations will be held, but at this stage it seems unlikely that sufficient progress will be achieved until there is a breakthrough at the EU summit in October, “experts said.