Upgraded GDP Builds Rate Hike Case for Bank of England

Market Trends - 22/02/2017

In yet another sign that the United Kingdom economy has deftly managed to avoid the worst-case scenario prognosticated by the “Brexit” detractors, the second estimate of fourth quarter gross domestic product came in stronger than anticipated.  Expansion for the period printed at 0.70% compared to an earlier estimate of 0.60%.  However, it should be remembered that this is just the second estimate, and that the final figure is due at the end of March, likely around the initiation of EU exit negotiations.

The main drivers of this better figure were increased exports and the positive contribution from household expenditures while business investment continued to falter in lieu of the uncertain outlook for the UK’s relationship with the remainder of Europe.  Although on an annualized basis the economy expanded by a 2.00% pace through the end of the final three months of 2016, for the calendar year, expansion totaled 1.80% compared to 2.20% in 2015.  Even as GBPUSD fell after the announcement, erasing the prior session’s gains, any hint of tightening over the upcoming weeks could be enough to spur another run towards 1.2800.

While the slowing pace of annualized expansion is largely indicative of the challenging environment facing businesses as they prepare for the potential ramifications of “Brexit,” continued accommodation from the Bank of England will likely help buoy growth.  As evidenced by the most recent remarks from Central Bank Governor Mark Carney, the institution is slightly more upbeat about the outlook, even commenting that rate hikes may be on the approach if joblessness reaches the recently revised equilibrium unemployment rate of 4.50%.

Furthermore, with inflation forecast to return to target levels during this calendar month, the quarterly acceleration in growth may be another feather in the Bank of England’s cap ahead of the next meeting in the middle of next month.  Although no adjustments are expected for interest rates, should the triggering of Article 50 have a more limited impact on the Pound and sentiment, it could foreshadow the advent of higher rates during the subsequent meeting, fueling additional gains in Sterling despite the most recent dip.

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