Good morning,

Money’s not too cheap to mention

Comments from the Bank of England yesterday were not enough to move the pound one way or the other despite the Bank’s Financial Policy Committee leaning on banks to raise £11bn to guard themselves against what policymakers feel is a worrying rise in the level of Consumer Credit in the UK.

While the argument around interest rates in the UK is not as simple as a trade off between inflation and growth the consumer credit picture in the UK does allow for a hint of simplification; higher interest rates may allow inflation to drift back to its 2% target in the next year or so and similarly we may see investment pick up into the UK economy from yield hungry investors however this all takes 6-12 months at least whereas an increase in interest rates is passed on to consumers within days. Wages are not strong enough for higher borrowing costs and while some members of the Bank’s Monetary Policy Committee may think that a hike is worthwhile we have serious doubts that the majority will be swayed.

The expansion of consumer credit has mainly been focused on unsecured borrowing via credit cards and on car purchases. An increase in the cost of debt servicing on something like a car or a house will be prioritised over areas such as High Street spending.

Brexit back and forth

Sterling is also priced for the kind of headlines gracing the front page of The Times today that the Chancellor Phillip Hammond and Secretary for Brexit David Davis don’t see eye to eye. If you are surprised by this revelation then I have some beans to sell you. We would suspect that any sterling declines due to these kind of headlines would more likely come as and when the lack of clarity at the top of the decision making tree either delays talks or is seized upon by the EU to drive the UK further into a corner.

Draghi speech puts euro on a flyer

The euro is going great guns this morning following a speech by ECB President Mario Draghi that the markets have leapt on, and in my view, overreacted to as well. Draghi stated that the global recovery is firming and broadening (which it is), that deflationary forces have been replaced by reflationary ones (they have) but that policy should still remain accommodative, with persistence and prudence.

The euro has broken to its highest level vs the USD since June of last year in the past 24hrs and has drilled GBPEUR to its lowest level since November. While we remain bulls on the single currency on the basis of a stronger economic data and an eventual tapering of QE and interest rates we think that the market may have read too much immediacy into Draghi’s comments and while he may not do so, Draghi may choose to re-emphasise the persistence and prudence part of yesterday’s speech when speaking later at an ECB event.

Apart from the panel discussion at 2.30pm the data calendar is rather quiet.

Have a great day

Jeremy Cook, Chief Economist

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