Derek Halpenny. European Head of GMR at MUFG, notes that the pound weakened modestly yesterday (well until the FOMC anyway!) in response to a broadly fiscally neutral budget by Chancellor Osborne that was without any major surprises and failed to alter the expectations in regard to monetary policy.
Key Quotes
“What the budget details did highlight was the damage a lower growth profile is doing to the government’s fiscal objectives. The OBR came in for some criticism when revisions announced in the Autumn Statement last year gave Chancellor Osborne GBP 27bn of extra funds to play with but yesterday the OBR acted the other way with revisions to productivity, wages and inflation which took GBP 56bn away from the Chancellor.
As a result, the second of the three fiscal objectives was broken in this budget with the government projecting an increase in the overall debt-to-GDP ratio. The government had promised that this ratio would fall each year of this parliament. The key factor in that promise being breached was the OBR changes, resulting in a lower growth profile. Real GDP growth was 0.1ppt lower at 2.2% last year and was expected to be 0.4ppt and 0.3ppt lower at 2.0% and 2.2% in 2016 and 2017 respectively.
While officially two of the government’s three fiscal objectives have now been broken, in reality the third and final one is also be in doubt. That objective – that the budget will post a surplus by the end of the parliament – looks very dubious based on the forecast profile. The budget position will undergo a remarkable turnaround in the final year of the parliament, going from a deficit of GBP 21.4bn in 2018-19 to a surplus of GBP 10.4bn in 2019-20. But this dramatic change is described by the OBR as a “shuffle” and the reality is that the weaker growth profile in the UK is playing havoc with the government’s fiscal objectives.
What is clear is that any sudden external shock to economic activity would have to be largely dealt with by the BOE with little flexibility available fiscally. ‘Brexit’ is one obvious shock and that’s likely to keep yields in the UK very well anchored in the coming months.
Today the BOE will announce its policy decision and the vote is likely to be 9-0, like last month. The rhetoric from certain MPC members certainly suggests a subtle shift more toward the potential need for additional easing. We don’t expect to see that today in terms of a vote to cut but further evidence of ‘Brexit’ uncertainty hitting confidence may bring out a vote for cutting – perhaps Gertjan Vlieghe or Andy Haldane are the likeliest candidates. While dollar selling looks like the theme for the FX markets for now, we’d be surprised to see GBP/USD advance much from current levels.”
(Market News Provided by FXstreet)
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