The market is seen to ignore the parliamentary hearings on inflation, which were held on Tuesday in the British House of Representatives. The focus of traders is still on the topic of Brexit, and all other factors remain in the shadows. Of course, if Britain leaves the EU without any deal, the current inflation forecasts will lose their relevance, especially in terms of monetary policy prospects. But if we take the favorable scenario as a basis, then it is impossible to ignore the current assessment – after all, in the case of the "soft" Brexit, traders will again focus on the intentions of the English regulator.
In general, Mark Carney repeated the previously voiced thesis - in particular, that the chaotic exit of the country from the EU will turn into a "shock therapy" for Britain and Europe. In his opinion (and he stressed that this is his personal opinion), in the case of a hard Brexit, the investment climate in the country will deteriorate several times more than with the worst and most unprofitable deal. He also warned that it is impossible to "prepare" for Brexit without a deal, opening a kind of spare parachute: preparation for such an outcome includes only the realization of catastrophic consequences of an economic nature. Also, Mark Carney is also very veiled, but still made a reduction in the interest rate – according to him, the Bank of England will assess the situation taking into account a set of factors, and then take the appropriate decision.
It should be noted that the head of the English regulator not only supported the deal approved recently by the ministers, but also described the negative consequences of hard Brexit in paints. In his opinion, in this case the country will find itself in a "very unusual" situation – the last time the western economy was in such conditions was more than forty years ago, that is, in the 70s. Then, Carney recalled, the oil embargo of OPEC exporting countries against the background of a sharp rise in "black gold" prices which plunged many countries into a deep recession. The head of the Bank of England warned that Britain expects a similar scenario if the Parliament does not support the proposed agreement. Summarizing the emotional assessment of the possible consequences, Mark Carney warned that the forecasts of the Bank of England laid "soft" Brexit and a smooth transition period. Moreover, the central bank will not voice the analysis of an alternative scenario, that is, the chaotic exit of the country from the EU.
In other words, Mark Carney provided a very significant service to the prime minister, organizing a kind of "PR-campaign" approved by the government. And although the head of the central bank did not say a word about the benefits of the agreement, he spoke quite eloquently about the catastrophic nature of its absence as such. Here it is necessary to remember the fact that he spoke before those deputies of parliament in whose hands the fate of this deal lies.
It is difficult to say whether he persuaded the doubting parliamentarians and" hawks " or not – but in any case, Carney very timely reminded the deputies about the economic consequences of disordered Brexit. Now there is a pause in this issue, and everyone is waiting for a key vote. Therefore, such "pr-campaigns" play into the hands of supporters of the soft "divorce" process.
As for the inflation outlook, Mark Carney sounded fairly optimistic thoughts. First, he noted the growth of wages (the latest release was much higher than the forecast values) and an increase in demand for labor. Secondly, Carney expressed confidence that these factors will increase the price pressure in the country, dispersing further inflation indicators. By the way, here the head of the Bank of England again returned to the risks of a hard Brexit – in his opinion, such a scenario will reduce consumer activity and neutralize many inflationary processes. It is worth noting that throughout his speech, he somehow returned to the risks of a chaotic Brexit – this topic was held in his speech as a "red thread".
But the pound did not appreciate such a bright and dynamic speech of the head of the English central bank. Mark Carney has previously voiced the apocalyptic scenario of a hard Brexit, as well as the probability of easing monetary policy. The market has long realized that the prospects for increasing the interest rate depend primarily on the relations between London and Brussels, and only in the second place – on the dynamics of key macroeconomic indicators. Whether the parliamentary speech of Carney influenced the deputies is a controversial and debatable issue. Therefore, this factor had a weak influence on the position of the British currency.
But the main conclusion of the day's event is that the Bank of England is satisfied with the dynamics of inflation indicators – this allows us to count on another rate hike in the first half of next year. Naturally, if Britain chooses the option of civilized exit from the EU.
The material has been provided by InstaForex Company - www.instaforex.com