The Bank of England’s decision to keep rates on hold this afternoon saw Sterling climb over a cent against the Euro and US Dollar, surprising the market who were anticipating a rate cut. Mark Carney has hinted at stimulus in the future and it looks as though August’s forecast and inflation report will be the basis of such stimulus.
UK economy to hit further turbulence
Although the news today was positive for Sterling the impact of Brexit will likely impact the British economy in the weeks and months to come. As businesses begins to absorb the shock of Brexit investment will likely shrink and spending will deteriorate due to the uncertainty. The BoE may have to force their hands in the August Interest rate decision which could see further losses for Sterling. Alternatively, Mark Carney could look at quantitative easing which historically also has negative implications for currency. It looks as though Sterling may be in for a bumpier road ahead.
Philip Hammond confirms UK will leave the single market
The newly appointed Chancellor Philip Hammond spoke to LBC and has confirmed that he has plans for the UK to leave the single market entirely. “We will come out of the single market as a result of our decision to leave the European Union,”. However, he would like to see negotiations to allow British businesses access to the single market.
His comments raise two important questions for the future of the UK;
1. How will he get access to the single market without free movement of people?
2. What does the new government have instore for free trade agreements elsewhere?
Given that no country has had access to the single market without free movement of people, It’s difficult to envisage how the UK could have access to the single market without being bound by some EU regulations. One exception that may be considered is the Canadian-EU deal which has taken almost 7 years to complete. If a similar deal was to materialise, 7 years of uncertainty for the British economy would be damaging, and would be just as damaging for Pound Sterling.
The new government may look to arrange free trade agreements with other nations, leaving the doors open for further uncertainty. But in any of the above scenarios, Pound Sterling will likely remain on the weaker side for a longer period of time. Although currency exchange rates are less than optimum, you may wish to take advantage of current levels in the event markets move further against you.