The pound will have more than Brexit to focus on after the election
The last BOE monetary policy meeting saw the central bank leave its bank rate unchanged at 0.75% but there were two dissenters calling for a rate cut instead. That goes to show the current tilt in terms of central bank sentiment and it is more dovish.
But will the UK election change anything going into next year? Let's take a look.
The state of the UK economy
There's no beating around the bush here. Brexit uncertainty has weighed on the UK economy heavily during the course of the year and this has pushed economic growth to near standstill levels now with Q4 growth even likely to contract as a result.
Under normal circumstances, this should prompt monetary easing to support the economy but the enigma that is Brexit continues to put the UK economic outlook in a quagmire - with domestic politics also not helping i.e. election uncertainty.
The UK election may not resolve anything
On the face of it, a Conservative majority in the election could put an end to years of Brexit uncertainty and perhaps lead to a boost in investment and economic confidence.
However, there is still the issue of negotiating a future trade relationship next year. As such, Brexit risks won't completely clear up or disappear despite the election result leaning towards a more hopeful outcome.
The worst-case scenario is that we see another hung parliament result and this means resigning to the status quo and with domestic fundamentals already so weak, the UK economy will just continue to bleed even more next year.
What options are there for the BOE in this case?
In my view, the BOE can only look at one direction when moving at this stage. And that is leaning towards rate cuts considering the Brexit outlook.
As mentioned above, even with a Conservative majority, there is no guarantee that economic conditions will improve well enough to even consider going back to the path of their now infamous "gradual rate hikes".
As such, I doubt we will get to a point where the BOE can even consider tightening again but instead they may just be sidelined once again until there is more clarity on Brexit.
On the flip side, if the Brexit drama is prolonged, the BOE can only wait in the sidelines for so long before it has to step in to try and shore up economic confidence in the UK.
Hence, at best the UK election result should see the BOE maintain their current stance next year with hopes of Brexit being resolved eventually. At worst, rate cuts are coming and that is going to be a headwind for the pound in the coming months.
