Creme de la Menthe, Rodney

The reaction of the FTSE 100, and that of the pound, to Theresa May’s speech on Tuesday was predictable. Sterling which traded at one point on Monday below $1.2, before recovering later in the day, rose almost 3% on Tuesday. That gave the FTSE 100 the excuse to see profit taking. The saying goes, sell on the rumour buy on the news, as the markets often price in the expected outcome. The much anticipated and well leaked speech tried to offer, an olive branch to Europe, and a welcome mat to the rest of the world. The message is, the UK is not leaving Europe, it is joining the rest of the world. The prime minister pushing the line that it must be in the best interests of Europe and the UK to come to a constructive conclusion. The question would then be, should the UK government manage this successfully, does it offer a blue print for other disaffected European countries to attempt to do the same? That will be France and Germany’s concern.

 Consumer price inflation for December for the UK economy came in modestly above expectations at 1.6%, this however remains below the Bank of England’s 2% target rate. The UK is not the only country to see inflation picking up in the past months. US Inflation has now hit the Federal Reserve’s 2% target. Inflation in the euro area jumped in December to 1.1% from 0.6% in the previous month. Even Japan, where inflation has thought to something resigned to the history books, rose last month.

This rise in inflation has apparently now taken the Governor of the Bank of England by surprise. In a speech, on Monday night, the once dovish Governor is now hinting at the possibility at reversing the decision made to cut rates last August, as prices rise as a consequence the fall in sterling. One must wonder how much of Mr Carney’s policies are made up along the way. We now know his much-predicted collapse in the UK economy on the Brexit vote has not occurred. His knee jerk reaction in August now seems even more of an act of self-justification. The Banks ability to make any credible economic forecasts under his watch have been far from the mark.

Mark Carney is not alone in his ability to forecast UK economic growth, the IMF announced yesterday they have increased growth expectations for the UK economy for this year. They have however downgraded expectations for next year. They have also upgraded forecasts for global growth for the year ahead. Bodies such as the IMF and the World Bank are paid to make economic assumptions about the global economy, but one can usually rule out the prediction as being the likely outcome. 

Posted on January 17, 2017 .