Good morning,

GBP: Bank of England all talk but no walk

Tuesday’s surprise jump in inflation has heightened some people’s expectations of an interest rate rise by the Bank of England in the coming months to quell price rises. While we believe that the Bank of England will chastise markets for not meaningfully pricing in the possibility of higher borrowing costs, that is not the same as pricing in future hikes.

We noted at the May Quarterly Inflation Report that the Bank of England was looking to inject a little 2 way risk into prices and we see something similar from rate setters this month especially given the recent drift close to trade weighted lows on the sterling index.

It is our expectation that the current inflation surge will top out in the coming months and allied to a picture of a pre-recessional economy and poor wage figures, interest rates are not going anywhere this year or next.

Sterling’s course is never easy to plot but we think that the pound will be able to hold on to its gains through the Bank of England meeting and minutes given the Monetary Policy Committee’s belief that current rate expectations are too low but that poor economic data and the political landscape will still act as a depressant over the longer term.

GBP: Taken off highs by poor wage data

While the overall unemployment report may have shown that there are more people in work than there has been for over 40 years those people are still seeing wages that are unable to keep up with the level of inflation and are therefore only getting poorer. Wage increases are simply not coming for a multitude of reasons; low productivity, fears over what Brexit may do to individual sectors’ trade relationships and margins cut by higher import costs have all been referenced by companies large and small so far in 2017.

This is now the nature of the UK business landscape and shows that these multi-decade lows in joblessness are not something to be celebrated.

AUD: On the Asian rollercoaster

It has been a wild ride overnight for the AUD but the Aussie has managed to hold on to most of the gains afforded to it by a strong employment report. The Australian economy managed to add 54,200 jobs over the quarter compared to wider expectations of gains of 20,000 and with more people participating in the jobs market than had been expected too.

The dip came as China released retail sales and industrial production data that suggested a slowing of the Chinese economy in August.

Despite the strength in the Australian data, expectations of whether the Reserve Bank of Australia has enough confidence to cote for higher rates will be crucial to the AUD’s path moving forward.

Have a great day.

Jeremy Cook, Chief Economist