Sterling has recovered against both the Dollar and Euro despite Eurozone GDP growth coming in line with expectations of 0.4% quarter-on-quarter in Q1 and the release yesterday of data showing a collapse in UK credit growth in March.
Consumer lending fell to just £254mn, the lowest amount since November 2012. This can be a volatile monthly series and secured lending rose 30% yoy to £4bn, the high since April 2016. But overall lending was still down 3% qoq in Q1 2018, following a 6% contraction in Q4 2017. Bank lending growth has slowed sharply in the past 18 months with the Bank of England tightening lending standards and banks increasingly wary of lending to stretched households. Along with stagnating real wages this is likely to curb consumer demand and in turn demand-pull inflation.
At the same Prime Minister Theresa May has had to contend with the recent forced resignation of Home Secretary Amber Rudd, an impasse over whether the UK should remain in a customs union post Brexit and the government’s successive defeats in the House of Lords over Brexit-related votes.
The underlying macro picture and fragile political backdrop make it increasingly unlikely that the BoE will hike its policy rate next week and are likely to weigh on Sterling. But with markets pricing only an 8% probability of a 25bp rate hike on 10th May, Sterling’s rebound could extend a little further if the BoE signals that it may still hike rates later in the year and a number of banks have issued long-Sterling recommendations.
