BoE SITS ON ITS HANDS BUT UK COURT THROWS BREXIT INTO MORE UNCERTAINTY

By Research Desk
about 8 years ago

 

By Ruma Dubey

The US Fed Reserve sat down on its hands when it came to an interest rate decision; it has been sitting on its hands for a long time now. The reason was most obviously the US Presidential elections.

In another developed country, UK, it was time for its central bank, the Bank of England (BoE) to take a call on its rates. It too sat down on its hands and its reason – the impending Brexit, which is expected to happen not like next week, but in 2019.

If US Fed fanned the fires of speculation, not coming forth straight about when the hike will come, BoE very categorically played down chances of any more rate cuts in the coming months. In fact, it surprised everyone by saying that the impact of Brexit will not be as bad next year, contrary to what it had expected earlier.

BoE went on to say that there is a limit until which it will be able to tolerate the inflation crossing the 2% target post which it will start raising borrowing costs- more so if the Pound continues with its steep decline thus fueling inflation.

The US Fed’s FOMC has 10 members who vote and the BoE has a nine-member committee and they all voted to keep the interest rate at existing 0.25%. It has also voted to continue with its $86 billion or £70 billion asset buying program, as announced in August’16.

Unlike the US Fed which was dovish, the BoE seemed more optimistic, at least about the next two years. It actually upped its quarterly forecasts – penciling in a growth of 2.2% in 2016 v/s earlier estimated 2% and growth of 1.4% in 2016 v/s earlier estimate of 0.8%; though it expects growth to start tapering off sharply from 2018, well into 2019.

The pound has been taking a beating ever since the Prime Minister, Theresa May said that she was ready to let go of economic ties with EU in favour of tighter control of immigration. Thus taking this “pounding” of the pound into consideration, the inflation target for 2017 has been raised to 2.7%, much ahead of its target of 2%. In fact the PM said that she was going to invoke the Article 50 and launch the official process of exiting the EU in March, to ensure that negotiations will get wrapped up in two years and UK would be able to exit by 2019.

But nixing this very statement, came a UK court ruling – it stated that the Government cannot kick off the process of leaving the EU without a vote from the Parliament. What this means is that if indeed this verdict is upheld, those who had voted to stay will wield more influence over how Brexit is executed, with many expected to delay or even stop the process. Thus this court ruling has plunged the country into some more uncertainty though the Pound is happy with this verdict and actually appreciated against the dollar.

This ruling has not gone down too well and many call it “politicizing the will of the people”. The country voted for an exit and how can a court ruling now overturn the will of the people. If this does go through, surely the Brits will be forced to take to the streets in massive protest.

One cannot help but question the very logic of the ruling. Wasn’t the referendum for Brexit approved by the Parliament after which the vote was taken? So now why the need for Parliament approval for executing the result of the referendum?

Clearly, the UK court is putting its thumb on the scale…tsk, tsk!!

PS: While the developed countries have their own issues and reasons for not hiking rates, the battered economy of Egypt, went ahead and hiked rates today by 3% and took the dramatic step of allowing its currency to trade freely. Different strokes for different people!

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