The GBP was the best performing currency yesterday as comments from European Commission president, Jean-Claude Juncker, suggest a notable shift in the EU position on Brexit.
Juncker struck an optimistic tone, stating that he was doing “everything to get a deal” and that he did not have “an erotic relation” to the Northern Ireland backstop. Juncker went a step further by stating that he was prepared to remove the backstop from the Withdrawal Agreement so long as the “alternative arrangements meet the main objectives of the backstop.”
The Bank of England said Brexit uncertainty and slower world economic growth were increasingly causing Britain’s economy to perform below its potential, and that a failure to reach a deal to leave the European Union by October 31st would worsen the problem.
All nine members of the BoE’s Monetary Policy Committee voted to keep rates on hold at 0.75% and reiterated their warnings that a no-deal Brexit risked hitting Sterling and damaging growth.
Policy minutes, for the first time, gave an explicit warning about the impact of a further Brexit delay, saying “entrenched uncertainty” about the terms on which Britain would leave the EU would also cause harm, albeit on a smaller scale.
Prime Minister, Boris Johnson, has vowed to take Britain out of the EU by October 31st, without a transition deal if necessary. However, Parliament has ordered him to delay departure if he cannot broker a fresh agreement with the EU that Parliament also backs.
Almost no economists expect the BoE to raise interest rates unless Britain leaves the EU in an orderly way. However, unlike the U.S. Federal Reserve and the European Central Bank, the BoE says it wants to raise rates gradually over the medium term, as long as a no-deal Brexit shock to the economy is avoided and global growth perks up a bit.
In the event of a no-deal Brexit, policymakers repeated their view that all policy options would be open, depending on the damage to growth and how much inflation spikes from a likely fall in Sterling. BoE Governor, Mark Carney, who is due to step down on January 31st has said his personal view is that the BoE is more likely to need to cut rates after a no-deal Brexit.