CEO Coriolis Technologies
The UK’s political turmoil will overshadow the Bank of England’s Monetary Policy Committee (MPC) meeting this week; EU leaders will be meeting to discuss the UK parliament’s request to extend Brexit beyond 29th March and there is little doubt that this will grab headlines instead. The EU Leaders’ Summit is unlikely to agree an extension this week increasing the risk of a no deal Brexit through miscalculation. The disaster planning out in place by the Bank of England was designed to be a stress test only but may yet override anything that the MPC decides.
Certainly the MPC meeting this week is low key. It is unlikely that there will be any announcement to alter rates, if nothing else because at least two of the members have stated that they need to see broader evidence of inflationary pressures in the UK economy before they agree to any increase in interest rates. The biggest concern at present is the uncertainty caused by Brexit that has resulted in investment falling in every quarter since the beginning of 2018. Retail and house price data published this week will give further insight into the impact on household demand of this persistent uncertainty.
So why is it more urgent that the MPC and the Bank of England consider trade and trade policy at their meeting in order to ensure that monetary policy is fit for purpose as and when Brexit happens? The answer to this question rests in the US Trade Representative’s (USTR) negotiating objectives published in February 2019.
Buried at the end of the USTR’s document was a note on currency manipulation that has largely gone unnoticed. It states that the negotiating stance is to “ensure that the UK avoids manipulating exchange rates in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage.” This means that once within any future trade deal with the US, the Bank’s monetary policy stance will be watched, and potentially disputed, by US trade officials for evidence of currency manipulation that favours UK exporters over US importers. In other words, UK monetary policy could become part of trade disputes with our largest trading partner – hardly the makings of independent trade policy.
Admittedly, the UK need not feel alone in this. The USTR’s approach is to make currency manipulation by its trade partners a central pillar of any trade deal, including with China, Japan and the EU. Effectively, this means that the US will have an indirect control monetary policy around the world in the interests of keeping the US dollar at a level that ensures that its exports are cheaper in overseas markets. It is hard to see how the Bank of Japan and the ECB will fall in line behind this and we can expect tensions to rise when the stalled talks resume.
Meanwhile, the UK is isolated in its current position. It is neither able to engage as part of the EU nor able to embark on its independent negotiations with the US. When it does engage, it will be as the US’s fifth largest export partner representing just 4.4% of its total imports – a drop in the ocean compared to China’s 26%. The value of sterling is 65% correlated with the value of UK’s export trade with the US – in other words, there are some advantages to a weaker value of sterling for UK exporters, but not enough to warrant aggressive monetary policy.
The Bank of England’s MPC will not raise rates this week, indeed it would be foolhardy to do so when there is so much uncertainty at present. However, policy makers should be thinking about how little influence they may have in the future if UK’s trade policy becomes “independent”. This should focus minds on what it will take to make the UK truly competitive in the future. It is an opportunity to re-focus its thinking again around labour markets and productivity which affect real incomes in the future.
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