The Daily Update - UK MPC

The UK will have a new Prime Minister tomorrow. After her main challenger pulled out of the race, Theresa May will become the UK’s second female PM – two months earlier than expected. What a difference between the two main parties; Labour politicians are still trying to get rid of the leader they have after just nine months. The news saw GBP make its third straight day of gains to a 1.3122 high and UK 10-year Gilts gave back a little, about half a point, but that should be taken in conjunction with the almost six point rally following the 23rd June vote.

May’s first job is to focus on the cabinet reshuffle and fiscal policy. She will have to decide very quickly who will lead the Brexit negotiations, who will be chancellor and who will succeed her as Home Secretary and deal with the main issue in the referendum, immigration. May has already made it known that she favours waiting to trigger Article 50 of the Lisbon treaty, which begins the two year withdrawal process from the EU, next year not this year.

Meanwhile the monetary policy debate at the Bank of England has turned 180 degrees. Just a few weeks ago the market was betting on the timing of a tightening in policy, now faced by economic weakness, following the vote, it is odds on that an easing will take place as early as this week but certainly within the next month or so.

The MPC have to deal with a trade-off of growth versus inflation as there are sure signs of a weakening in economic activity, but the big question is how far will the economy slow in the coming months. Action now to help steady the expected slowdown could pay dividends later. On the other side of the equation is the nearly 10% fall in the value of the sterling which is certainly going to push import prices up and therefore inflationary indicators, the MPC will have to decide how high can they expect it to rise and over how long a period.

Mr Carney over to you Sir.