A big week for central banking

Osborne may be overshadowed by Bank of England (BoE) Governor Mark Carney. The bank’s Monetary Policy Committee has to walk a high wire when it meets Thursday. The bank reckons Brexit risks a much bigger trade deficit and a crash in the pound. That could trigger a blow out in the current account deficit, where foreign direct investment in the UK dries up. Why would that happen?

If Britain does vote to leave the European Union, Article 50 of the Treaty of Lisbon says the negotiation to exit could last up to two years. It’s a pretty one-sided negotiation as well. The rest of the EU states decide on the terms. And then Britain can either take it leave it. But if Britain’s already left, then taking the deal would appear to be the only option – no matter how bad the deal is.

But a discussion of the Lisbon Treaty is beyond the scope of today’s report anyway. The point I wanted to make is much more direct. UK shares will have trouble following US shares higher as long as the Brexit uncertainty lingers.

And it’s going to linger until at least 23 June

The bank also has to reckon with the impact of potentially higher oil prices. The International Energy Agency surprised markets last week when it said that the oil price had “bottomed out.” That announcement was followed by news that the Baker Hughes rig count in the US – a measure of oil production – had declined to its lowest level since 2009.

The oil price, then could get a boost from a reduction in supply. But keep in mind Iran. Now that it’s back on the global oil scene, the Islamic Republic wants to produce four million barrels of oil this year. That’s supply the market hasn’t had to reckon with in recent years. It also makes the recent rise in the oil price a bit suspect.

Good luck to Mark Carney in figuring out what inflation will do this year!

Poor trade figures and below-par economic growth would argue for a rate cut. But if the Federal Reserve talks about “normalising” US rates later this year when it meets on Tuesday and Wednesday, and if the bank is worried that inflation will pick up later this year, a rate RISE would be the prudent call. Carney’s job would be much easier if he quit and let the free market decide what the price of money should be (and what money itself IS).

Dan Denning's Signature

Category: Central Banks

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