UK: Since Brexit, politics matters more than economics – Goldman Sachs

Analysts at Goldman Sachs suggest that while assessing the impact of macroeconomic data surprises, monetary policy news and political announcements on UK asset prices, he found that asset prices have been more sensitive to Brexit-related political announcements than to macro data surprises or monetary policy shocks since the Brexit vote. 

Key Quotes

“The market response to Brexit-related political news depends on how then announcement affects the economic outlook. Those effects go beyond whether Brexit is ‘soft’ or ‘hard’ to whether the impact of Brexit is limited to the real exchange rate or whether it also affects domestic demand and/or foreign investor confidence in UK assets.” 

“This allows us to classify Brexit political announcements based on the strength of the ‘domestic demand effect’ of Brexit relative to the ‘risk premium effect’. In general, Brexit-related news has not involved much of a risk premium effect (or this has been dominated by other effects). Yet, there have been exceptions to this rule. The most notable exception was PM May’s October 2016 Brexit speech, which was followed by the BoE becoming more hawkish and dropping its policy easing bias the next month.”

“Reassuringly for the BoE, Sterling’s additional 2% (trade-weighted) weakening in the past month has not coincided with a risk premium episode. This gives the BoE greater flexibility to ‘look through’ its inflationary impact. We expect BoE communication, including at next week’s MPC meeting, to signal that (i) Sterling weakness is, in general, “policy-relevant”. Yet, (ii) Sterling’s recent weakening does not add significantly to the case for an immediate rate rise. Our modal outlook remains that the BoE keeps Bank Rate on hold until 2018Q4 and that Sterling weakens a little further. As our results suggest, Brexit-related politics amid general Sterling weakness poses a risk of an earlier rise in Bank Rate.”