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From Brian Welch   

1st July 2016

UK Economic Comment – July 2016

3 month £ rate: 0.4935 (15/7/16) 0.5640 (Jan 15) (1.01438 April 12) (0.98169 Oct 11)(0.7575 Dec 10)

6 month £ rate: 0.58438 (15/7/16) 0.68531 (Jan 15) (1.33031 Apr 12) (1.25969 Oct11) (1.05125 Dec 10)                     

Repo (Base) Rate: 0.5% reduced from 1.0% on 5th March 2009

 

£/$     1.3234 (15/7/16) (1.5388 Jan 15) (1.5484 Apr 12) (1.5956 Oct 11) (1.539 Dec 10) (1.6378 Nov 09)                            

$/€  1.1071  (15/7/16)  (1.2031 Jan 15)   (1.3203 Apr 12) (1.3884 (1.4162 Oct 11) (1.328 Dec 10) (1.4818 Nov 09)  

£/euro 1.1954 (15/7/16) 1.2791 (Jan 15)   (1.2232 April 12) (1.1492 Oct 11)(1.1587 Dec 10)  (1.1054 Nov 09)

(£/euro 0.8365 (15/7/16)  (£/euro 0.7818 Jan 15) (0.8176 April 12) (0.7802 Oct 11) (0.863 Dec 10)  (0.946 Nov 09) )


BREXIT - Economic Events, Interest Rates and Inflation

So there it is. Brexit. I didn’t vote for it, but it was a close thing. To stay in was the correct short term solution. To leave was a much braver choice, but possibly, over the very long term it might be better…. although I might not be around to see it.

But Brexit has really put the cat amongst the pigeons – not just in the EU but in North America and the Far East, although it is difficult to see if that isn’t being used as an excuse for other problems closer to home. The world economy can’t be so fragile that it is derailed by a change in trading patterns to take place more than 2 years ahead. If the bureaucrats and the French ‘cut up nasty’, surely everyone will be the losers, but if there are pragmatic and civilised negotiations, both the EU and the UK can be winners.  If not, the biggest losers will probably be the remaining members of the EU.

After the predictable fall in Sterling and the Stock Market, equities have recovered most of their losses and generally, they have recovered in a way not anticipated before the vote. Sterling has fallen against the Euro – although not as far as the rates when we last holidayed in Italy in January 2013. More importantly Sterling has fallen against the USD – but it nearly touched parity against the USD in 1989, and was over 2GBP to the USD as recently as 2008, so all we can really say is that Sterling remains very volatile against the USD. There are just more sellers of Sterling than buyers. Could that change if Donald Trump were to be elected President in November? (Brick shares would be a good buy for the wall along the border with Mexico that he has promised to build).

Inflation is expected to increase as a result of the fall in Sterling, but last year everyone from the Governor of the Bank of England down, were worried about the risk of deflation, so overall, economists are never satisfied. No-one is predicting that Inflation will spiral out of control – indeed the MPC seems more worried about a slowdown in economic activity, whilst the new Chancellor of the Exchequer may be trying to bury austerity. As a result, any increase in UK Interest rates still seems a long way off, whilst the increase in US interest rates looked like a mistake, from the moment that they were increased.

The oil price, which had dipped to just under $28, at the beginning of the year has recovered to $50, but having been at $60 a year ago, it seems unlikely to go significantly higher for the time being.   

The political reaction to Brexit was both unexpected and astonishing – perhaps in years to come it will be seen as a civilised revolution - and the Labour party is still fighting itself in their own empty room. But now that we have the prospect of firm and stable government for the rest of this Parliament, and perhaps against all of the odds we might see strong non-inflationary growth. Now that really would be an achievement.

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