Speaker 1: Yeah, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane.
Speaker 1: Always with Michael McKee. Daily we bring you insight from
Speaker 1: the best in economics, finance, investment, and international relations. Find
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Speaker 1: course on the Bloomberg. It's the most hotly anticipated Bank
Speaker 1: of England decision of this decade. Well maybe not of
Speaker 1: the second because actually it was highly anticipated also three
Speaker 1: weeks ago. Anything post Brexit is highly anticipated. Governor Mark
Speaker 1: Karny has expect to cut rates in about ninety minutes.
Speaker 1: We'll bring in Brian Colton, now Fit Ratings chief Economists
Speaker 1: to exactly talk us through what he's expecting. Brian, great
Speaker 1: to have you on the program. This is highly anticipated.
Speaker 1: Last month, it was highly anticipated until we get of
Speaker 1: some kind of an idea resolution about what the data
Speaker 1: post Brexit looks like. We need to have the BOE
Speaker 1: try and help us figure it out. Absolutely, I mean,
Speaker 1: this is a very important meeting, but we certainly I
Speaker 1: don't think you can expect any big bazookers at this one.
Speaker 1: I mean, if we think about the radical moves that
Speaker 1: people have been talking about them going to negative interest
Speaker 1: rates or even very sharply ramping up the QUEI program.
Speaker 1: I'm not sure either those are really appropriate at this stage.
Speaker 1: Negative rates, well, the biggest impact we've seen elsewhere from
Speaker 1: negative rates has actually been to weaken the currency. Sterling
Speaker 1: is already weakened a lot of the Bank of England
Speaker 1: can't completely ignore the impacts of Sterling on inflation and
Speaker 1: then on on QUEI. Where the benefits there were to
Speaker 1: being long term interest rates down, well they've come they've
Speaker 1: come down. So I think it's going to be much
Speaker 1: more nuanced than that, and to sub extent, as you
Speaker 1: intimate in your question, there will be more interesting I
Speaker 1: think in what the Bank of England thinks is happening
Speaker 1: to the economy from this Brian, what do you think
Speaker 1: is happening? Because we had some some pretty terrible figures,
Speaker 1: But you you need to take a view on whether
Speaker 1: the month of July, because of the shark of Brexit,
Speaker 1: which the markets and businesses weren't expecting, is for that month,
Speaker 1: or whether it's a trend that will continue as we
Speaker 1: go on that the measures we've had so far we're
Speaker 1: really just a couple of survey indicators. We haven't. We haven't.
Speaker 1: They were pretty bad. We haven't yet had which is
Speaker 1: coming out of factories. Those the real hard data. We'll
Speaker 1: get those in the next two or three months and
Speaker 1: when we have a clear opinion there. I think it's
Speaker 1: pretty clear though that the level of uncertainty now is
Speaker 1: so so elevated about about what's the UK's future trading relationship,
Speaker 1: what's the regulatory framework going to be. Firms are not
Speaker 1: going to be doing the capex. There is going to
Speaker 1: be a big hit to capex. Bever agent to see
Speaker 1: how much that the Bank of England expects that. Brian,
Speaker 1: I want to congratulate you on the clarity of your
Speaker 1: note from Fitch. The elephant in the room is inflation.
Speaker 1: In two thousand and seventeen, you've got a nominal GDP
Speaker 1: and animal spirit for the United Kingdom that tells me
Speaker 1: they can't cut rates help me with real GDP plus big, big,
Speaker 1: big inflation next year. Does that limit Mark Kearney's optionality?
Speaker 1: I think it does to some extent. I mean we've
Speaker 1: already had fall in the current see we think that
Speaker 1: that's going to push up import prices in the UK.
Speaker 1: We've actually got inflation going slightly above three p m.
Speaker 1: I don't. I don't think that they can. They can
Speaker 1: be uh too gung hole on pushing interest rates deep
Speaker 1: deeply negative with with that scenario. Mark Connie said this himself,
Speaker 1: it's a very difficult situation to find themselves in here
Speaker 1: post Brexit. Yes, we've got a big demand shop from Capex,
Speaker 1: we've also got a shock to the UK supply side.
Speaker 1: Growth potential will be impacted by lower FDI, by by
Speaker 1: lower immigration. So there's a there's a there's a supply
Speaker 1: shop there, and then we've got the currency as well.
Speaker 1: That those latter two things mean more inflation. The trade
Speaker 1: off between output inflation in the UK is going to
Speaker 1: be worse. That makes it more complicated for a central
Speaker 1: bank US to engage in easy in francy. And what
Speaker 1: we just heard there was a clinic that Mark Kearney
Speaker 1: has tattooed to his brain and his experts at the
Speaker 1: Bank of England. Hey, it's not as simple as saying
Speaker 1: Brexit bad, lower raids in fancying, I would go back
Speaker 1: to currency is the definitive and definitive of inflation reaction, right,
Speaker 1: I mean Tom overall, I think when you look at
Speaker 1: central banks. I don't think anything is easy. It's all
Speaker 1: in the nuances. It's all who gets hit how and
Speaker 1: what's the best transmission mechanism on pound? And actually this
Speaker 1: would be my private big question to Brank Colden. So
Speaker 1: we had a drop more or less in pound, right,
Speaker 1: we recoup some of that, but who does it actually
Speaker 1: help services? Which is what this country is very good at.
Speaker 1: Do you see an increase in services demand as pound
Speaker 1: files or not? Really? It's not like you're you know,
Speaker 1: selling engines. Sure, it's funny. And when when we're talking about,
Speaker 1: you know, how does sterling benefit the UK economy, Now
Speaker 1: we're talking about things like the number of foreign students
Speaker 1: that want to come to the UK for a university degree.
Speaker 1: You know those those are not things that change very
Speaker 1: very quickly, you know, sustainful in the pound over three
Speaker 1: or four years. Yeah, but you don't get the kind
Speaker 1: of suddenly we selling loads more cars to Germany. I don't.
Speaker 1: I don't think there's necessarily a huge benefit that And
Speaker 1: in fact, that was one of the things happened after
Speaker 1: the global financial crisis, the falling sterling. We all thought
Speaker 1: we're going to have a big booster from net trade
Speaker 1: didn't didn't really come through, you know, we don't. We
Speaker 1: don't sell that much exchange rate sensitive stuff anymore on
Speaker 1: manufacturing site and brand. When Tom was talking about nuances,
Speaker 1: I guess the project that it's not as simple as
Speaker 1: avoiding recession. You also need to see what happens to inflation,
Speaker 1: because if this country doesn't get access to a a single market,
Speaker 1: the goods that the UK will be importing can shoot
Speaker 1: up inflation at a time where actually see a recessionary environment.
Speaker 1: And I think you've got to remember, you know, and
Speaker 1: this is a broader global issue. You know, the trend
Speaker 1: towards globalization to more more more trade, you know, has
Speaker 1: been negative for for prices. That's that's helped bring inflation down.
Speaker 1: If we if we go back to world where we're
Speaker 1: pulling up the drawbridge, we're less open, we're gonna have
Speaker 1: less disinflation coming from abroad, and that's something that bank
Speaker 1: coming and will have to take into account. Definitely. We
Speaker 1: only think we're gonna get a twenty five basis point
Speaker 1: cut today. Brian, let's revisit the chart from the last
Speaker 1: week of June. Bring it up your boding if you would.
Speaker 1: This is the trade chart. The purple line is goods
Speaker 1: and services and it's remarkably level, as Sherman greens And
Speaker 1: would say quiescent. But the white line includes in the
Speaker 1: money flooding into the United Kingdom. The red circle is
Speaker 1: sort of that break where we see a horrific current
Speaker 1: account deficit. Brain, what's a dynamic here? Is this chart
Speaker 1: going to force Mark Kearney's hand? Well, the current account
Speaker 1: deficit is certainly a consideration in you know, what's what's
Speaker 1: going to happen to the economy. Obviously, you know we've
Speaker 1: been spending more than our income and that's been financed
Speaker 1: through through strong FDI inflows, including into UK commercial property.
Speaker 1: Of what what we have to bear in mind is
Speaker 1: that I think those capital inflows were to dry up
Speaker 1: too quickly, then we'd have to close that current account deficit.
Speaker 1: We'd be forced to close that current account deficit that
Speaker 1: much more rapidly. That actually means a worse recession. You
Speaker 1: need a bigger decline in UK domestic demand as as
Speaker 1: the foreign funding draws up. So that's a consideration when
Speaker 1: the central Bank's deciding how far to to to to
Speaker 1: cut interest rates and force the depreciation in Sterling itself
Speaker 1: has helped on that front. It's made assets cheaper. We're
Speaker 1: hearing lots of non European investors now getting interested in
Speaker 1: some of the UK UK assets because sterling is weaker.
Speaker 1: So that is one sort of way in which a
Speaker 1: week sterling helps. But if we're getting too a sort
Speaker 1: of ongoing weakening of sterling, then that could be counterproductive
Speaker 1: and I think they need to at least think about
Speaker 1: that in what they do today. Your work has been
Speaker 1: brilliant and as I really appreciate the idea of how
Speaker 1: big inflation is going to be for the United Kingdom,
Speaker 1: what this comes down to is a basic idea can
Speaker 1: a bank get out in front of the debate? We
Speaker 1: call that in America the ex post x anti debate.
Speaker 1: Schwarz and Friedman have looked at this. Richard Timberlake within
Speaker 1: the Georgia School and others. Where is Mark Kearney today?
Speaker 1: Is he gonna be ex post after he season numbers
Speaker 1: or is he going to really try to be ex
Speaker 1: ante is the city in the street want him to be?
Speaker 1: I think it will be more expost to be honest.
Speaker 1: I think you know that there's very strong arguments as
Speaker 1: to why the UK economy is gonna is gonna weak
Speaker 1: and but the level of level of certainty we have
Speaker 1: about that is very low, and I just don't think
Speaker 1: you can really be expecting the Bank of England to
Speaker 1: to offset the slowdown that we're gonna We're gonna have
Speaker 1: the you know, the nature of the shop we're worried
Speaker 1: about here is that companies are not going to be
Speaker 1: making the big ticket spending items a large hard to
Speaker 1: reverse spending items. They're just not going to be doing
Speaker 1: that now. Cutting interest rates twenty five basis points, it's
Speaker 1: really not going to make very much difference on that.
Speaker 1: So I don't I don't see how much of policy
Speaker 1: of anything more than really kind of defensive and reactive here.
Speaker 1: You know, what they really want to make sure they
Speaker 1: avoid is that this investment and uncertainty shock transforms itself
Speaker 1: into something worse, which is a rise in interest rates,
Speaker 1: are tightening in credit conditions in the UK. That's where
Speaker 1: they can help, But that is by its nature reactive,
Speaker 1: and I think that's where we're going to be. Brian
Speaker 1: Corton with us here with Fitch. Brian, that yellow circle
Speaker 1: is where you think nominal GDP or the animal spirit
Speaker 1: of the United Kingdom will be that really really limits
Speaker 1: Mark Curney's ability to cut interest rates doesn't and I
Speaker 1: still think they can. They can, they can move lower
Speaker 1: near term, and when we think the the impact of
Speaker 1: Brexit on demand is going to outweigh the impacts of
Speaker 1: Brexit on potential supply in the short term, but I
Speaker 1: think over the medium term, I would say this that
Speaker 1: the output inflation trade off in the UK is going
Speaker 1: to be worse post Brexit, and that probably means UK
Speaker 1: interest rates if anything, I've got to be more volatile
Speaker 1: than before. So we've got rates going down, but as
Speaker 1: immigration flows slowed down, as inward FDI slows down, potentially
Speaker 1: impact on UK product productivity. It's it's not going to be.
Speaker 1: It's not gonna be a one way, one way trick
Speaker 1: in terms of just just trying to boost demand. They've
Speaker 1: got to take into account the fact that that supply
Speaker 1: supply growth is not going to be a strong either.
Speaker 1: Right now. I want to bring that banner up. So
Speaker 1: this is I get I give time, keen and a
Speaker 1: plus right currently must will could may wait. This is
Speaker 1: the problem with our central banks, and it also depends
Speaker 1: on whether they follow the markets too closely. We saw
Speaker 1: that with forward guidance. Mrkarni abandoned here. It's a similar
Speaker 1: situation between the dark plots and actually being data dependent.
Speaker 1: I think forward guidance to this point, to be honest,
Speaker 1: would not be particularly sensible because they just don't know
Speaker 1: what the economy is going to do. Uh. You know
Speaker 1: that that that mixes, that mix has changed that you know,
Speaker 1: the models that they had are probably not going to
Speaker 1: work out that world for them. You know, Mark Carnie
Speaker 1: can't avoid the post Brexit slowdown in the UK. You
Speaker 1: can only kind of make it easier, we think just
Speaker 1: about and that's because partly because you get a bit
Speaker 1: of an export boost from weaker sterling, but also a
Speaker 1: bit of expenditure switching. So we think, you know, investment
Speaker 1: is the most important intensive component of demands, so the
Speaker 1: investment weekends, imports will weaken and so you'll get a
Speaker 1: sort of you know, along with the fact that imports
Speaker 1: are going to be more expensive, bit of export we
Speaker 1: call expenditure switching. So you know, for every pound that
Speaker 1: a UK residents spend a little bit more of that
Speaker 1: will be spent on UK goods. So that's probably what
Speaker 1: gets us out of a recession. We actually think if
Speaker 1: you look at domestic demand that's going to go down
Speaker 1: in seventeen in the UK, so demand recession, but not
Speaker 1: a GDP recession. Bryan, this has been fabulous. Brank Holton,
Speaker 1: thanks for a terrivic brief. He is with Fitch. Thanks
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