Sterling, which yesterday appreciated to an 11-session high, has weakened 0.3% today, driven lower by political developments, a dovish Bank of England policy meeting and weak retail sales data for May.
In the fourth internal ballot for the leadership of the Conservative Party and premiership, Sajid Javid was eliminated, leaving only Boris Johnson – the current front-runner – Jeremy Hunt and Michael Gove. This follows the elimination yesterday of Rory Stewart, the most pro-EU of the five candidates. Johnson, Hunt and Gove all favour the UK leaving the EU with a deal but while Hunt and Gove have argued that a small extension of Article 50 negotiations would, if required, be appropriate, Johnson has argued that the UK should leave the EU by the 31st October (the legal deadline), with or without a deal. The result of a fifth round of internal party voting, in which only two candidates will remain, is due to be announced at 18.00 London time. The two remaining candidates will go through to a ballot of the 150,000 Conservative Party MPs due to be held in coming weeks.
As expected the Bank of England kept its policy rate unchanged at 0.75% today, with all nine MPC members voting in favour. A number of MPC members, including Haldane and Saunders, had in recent weeks talked up the possibility of rate hikes, even in the event of a no-deal Brexit, but none were willing today to go against the consensus view that the uncertain political landscape and macro backdrop of weak growth and stable inflation
argue against any monetary policy tightening. Moreover, the Bank of England downgraded its forecast to Q2 GDP, now expecting zero growth following 0.5% qoq in Q1 2019. The 0.5% mom fall in retail sales in May, following on from a 0.1% mom contraction in April, gave further credibility to the Bank’s more bearish outlook for UK economic growth.
