2 to 8 July: The ‘unreliable boyfriend’ might keep his promise and deliver a hike in August

Bank of England Governor Mark Carney delivered a rather upbeat view on the UK economy last week. In the Governor’s opinion, the economic softness observed in Q1 was mostly due to adverse weather conditions and economic momentum picked up in Q2. He added that recent macroeconomic indicators are in line with the BoE’s forecast presented in the May Inflation Report and that the recuperation should persist thanks to accommodative monetary conditions. Further acceleration in growth, however, calls for tighter monetary conditions. The Governor therefore implied that the long-awaited second 25bp rate hike of the cycle might just be delivered in August thanks to this (perceived) improvement in the macroeconomic environment. The market agrees, with futures contracts pricing a strong probability of such an increase.

In contrast with the upbeat short-term assessment, Carney pointed out a wide variety of risks that could derail the UK’s economy in the long-run. Such risks are related to on-going global trade tensions and Brexit. Indeed, yesterday an example of these risks manifested as David Davis (the UK government’s Brexit secretary) resigned after being side-lined and in disagreement with Theresa May’s “soft” Brexit strategy. However, should the risks subside going forward, the upbeat mood of business leaders, which is reflected in the May PMI figures, together with ongoing weakness in the BP, could translate into additional economic output that could lead to further policy normalisation by the BoE.

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