The MPC speaks out on the Brexit vote - and it’s not sugar coated
A historic vote will be taking place on Thursday, June 23, 2016. UK citizens will have an opportunity to put their proverbial penny in the plate and vote on whether their country should remain part of the European Union, or break from it to pursue a go-alone approach.
One of the most important financial bodies in the United Kingdom is the Bank of England and its Monetary Policy Committee. Speculation was rife about what type of inflation report the BOE would produce in the lead up to the Brexit vote. Some were assuming that two sets of reports would be produced – one in the event of a Brexit, and one without a Brexit.
Ultimately, the Bank of England and its Monetary Policy Committee (MPC) produced a blunt report with all of their sentiments about a Brexit. The report basically contended that Q1 GDP performance for 2016 was lackluster, and that Q2 GDP growth for the current year will be equally disappointing.
This is based on declining consumer and producer sentiment, a delay in making big-ticket purchases, and balancing the contradictory objectives of inflation rate targeting and growth prospects.
How will the sterling react to a Brexit?
Naturally, there are multiple components of the UK economy and one of the most important facets is the currency. With regards to the GBP, an estimated 9% in currency declines have taken place since November 2015. Roughly 4.5% of those declines are a direct result of anxiety and uncertainty related to a Brexit.
The currency plunged when the former Mayor of London, Boris Johnson, was calling for a Brexit. Of course on the flipside, Prime Minister David Cameron and US President Barack Obama, in addition to IMF chief Christine Lagarde, pushed for the UK to remain in the EU.
The battle lines have been drawn, and one of the casualties of this war is the GBP. If nothing else, the uncertainty works to the detriment of the GBP and causes traders in the eurozone, the US and elsewhere to short the currency. The Monetary Policy Committee, for its part, has decided to adopt an approach that the UK will remain in the EU.
Beyond the Brexit, the UK economy is in a bind. The Bank of England does not take a favorable position on the state of the UK economy given the current growth projections. According to the BOE, economic growth in the UK for 2016 is now forecast at 2%, from 2.2% in February, and for 2017, growth is forecast at 2.3%, from 2.4%, and for 2018 at 2.3% from 2.5%.
The reason for these declines in consumer expenditure is fears that budget cuts by the government are likely. The inflation rate target for the Bank of England is 2%, and the BOE expects to reach this target by the middle of 2018. The MPC is expected to increase interest rates before 2018, but no specifics have yet been provided.
Everything right now is mostly hinging on the historic vote to occur on June 23. If the vote takes place and a Brexit is decided upon, the housing market is likely to come under tremendous pressure, with the bottom falling out.
Even the Chancellor of the Exchequer, Mr. George Osborne, reiterated that the lead up to the Brexit vote is a lose/lose situation regardless. This is based on the current performance of the UK economy, and trends that are clearly evident across the board.
Leading spread betting sites are of the opinion that a Brexit is less likely in the final stretch, and that ultimately the turnout on the day will determine which way the vote goes.