GBP: Central bank watching the depreciation – Rabobank

Analysts at Rabobank explain that the ECB is not the only central bank which seems to be closely monitoring the exchange rate as BoE policy maker Michael Sanders reminded that the markets that the central bank is not “indifferent” to sterling’s depreciation.

Key Quotes

“His comments coincided with sterling falling in trade-weighted terms close to the level that prompted similar remarks on the currency from Governor Carney in October 2016. Sanders outlined his case for raising interest rates arguing that inflation is likely to exceed 3% in the coming months on the back of rising domestic cost pressures. In his view there is an evidence that the labour market is “becoming increasingly tight.” While he didn’t dismiss the downside risk that Brexit poses to the UK economy, Sanders expressed his confidence that a slowdown in consumer spending can be offset by a sharp rise in exports and a modest recovery in business investment.”

“We remain of the view that the BoE is likely to keep interest rates unchanged at least until the end of 2018 as prevailing uncertainty caused by Brexit will weigh on private consumption and investment. That said, another sharp fall in the value of sterling would be inflationary and would increase the risk of an early hike by the BoE.”

“It goes without saying that Brexit negotiations are a major driving factor for sterling. Comments from EU chief negotiator Michel Barnier were far from encouraging on that front. Following the third round of talks between the EU and the UK, Barnier said that there has been no “decisive” progress. The Brexit bill (estimated at EUR 100bn) and the transition period are the main obstacles preventing both sides from moving to a new trade agreement.Two more rounds of talks will be held, butat this stage it seems unlikely that sufficient progress will be made until a major showdown at the EU summit in October.”