Lower oil prices a boon for Britain, Burnham and the Bank of England
The desk interprets lower oil prices as a positive development for the UK economy, potentially keeping inflation around 3% this year, thus alleviating pressure on the Bank of England and the future government under Andy Burnham. Per the full note source, the anticipated reversal of the household energy bill increase should help maintain CPI below previous peaks, leading to diminished expectations of interest rate hikes and more manageable public finances. This macroeconomic backdrop sets a favorable environment for the British Pound, particularly against the backdrop of a changing political landscape brought about by Burnham's imminent leadership. Our latest targets for this scenario reflect consensus expectations that continue to evolve based on this new economic outlook.
What the desk is arguing
The desk posits that the decline in oil prices could play a critical role in stabilizing UK inflation rates, potentially limiting them to around 3% this year. This easing will likely reduce the necessity for further interest rate hikes from the Bank of England, providing a respite for the financial landscape under the anticipated leadership of Andy Burnham, as per the note from ing-think.
Specifically, the comments highlight that July’s 13% energy bill increase is set to be significantly countered by a projected 9% drop in October, leading to CPI dynamics that the BoE views as crucial for maintaining stable inflation. This could ease the fiscal demands on the government and support the Pound leading into future economic adjustments.
Where it sits in our coverage
Our consensus target for GBP/USD currently sits at 1.075, with a range from 1.04 to 1.12. Notable firm targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This view aligns with jpmorgan, which sees the favorable inflation outlook as a driver for Pound strength, placing our target near the upper end of the expected range. In contrast, bofa presents a more cautious stance within the established bounds.
How other firms see it
Firms aligned with the optimistic outlook on the Pound include jpmorgan and citi, reflecting confidence in the easing of inflation and enhanced public financial stability. Conversely, bofa and hsbc hold a more bearish perspective, concerned about potential external economic shocks that may derail this progress.
Related currency pairs to monitor include GBP/JPY, as fluctuations in UK monetary policy could influence wider FX trends, particularly in light of the BoE's evolving stance against inflationary pressures.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Lower oil prices may lead UK inflation to peak around 3%, a key point for monetary policy stability.
- 02Eased inflation pressures could mitigate the need for substantial interest rate hikes from the Bank of England.
- 03Political transition to Andy Burnham may further complicate fiscal strategies but comes with advantages from the current economic outlook.
- 04GBP may benefit from this positive inflation narrative as positioning adjusts in the FX market.
Market implications
Traders should watch for GBP/USD movements near the 1.075 consensus target as it aligns with the broader inflation narrative. The anticipated fiscal responses from the upcoming Autumn Budget could influence market sentiment and positioning ahead.
Risks to this view
A resurgence in global oil prices or unexpected shifts in domestic economic performance could invalidate the easing inflation narrative, prompting a recalibration of interest rate expectations from the Bank of England and consequently weakening the Pound.
Articles Lower oil prices a boon for Britain, Burnham and the Bank of England Published 11:05 United Kingdom Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download UK inflation is unlikely to peak much above 3% this year, taking some of the pressure off the public finances and the Bank of England to hike interest rates James Smith Andy Burnham is highly likely to succeed Keir Starmer later this month Lower oil prices are good for Burnham and the Bank of England Britain is on the verge of its seventh prime minister in 10 years. Andy Burnham, former Mayor of Greater Manchester and newly elected MP for Makerfield, is highly likely to take over from Keir Starmer later this month. And whisper it, but his economic inheritance doesn't look too bad - or at least, not as bad as it could have been just a few weeks ago.
First, lower oil prices mean inflation is unlikely to rise much above 3% this year. July's 13% increase in household energy bills now looks set to be largely reversed by a 9% fall in October, assuming current gas prices hold. Not only would that leave CPI below last year's 3.8% peak, when the Bank of England was still cutting rates, but also below the 4% level that BoE research suggests is more likely to trigger longer-lasting second-round effects.
That eases pressure on the Burnham government to cushion households from living-cost pressures, though some support remains possible in the Autumn Budget. Bank of England tightening expectations have come down from their peak on lower oil prices, meaning debt-interest projections shouldn't rise as much as feared a month or two ago. Together with slower net migration and other forecast downgrades, as things stand, the OBR is likely to knock around £10bn off Treasury headroom under its current budget rule.
Even so, that should leave enough room to avoid a fresh round of fiscal tightening simply to keep the numbers adding up – something that current Chancellor Rachel Reeves has previously had to contend with. Contributions to UK headline inflation (YoY%) Source: Macrobond, ING "> Source: Macrobond, ING Second, Britain's public finances are improving, in contrast to the rest of the G7. Notwithstanding uncertainty surrounding the Iran war, the UK is the only such economy set to deliver a materially smaller structural deficit this year, helped by the continued freeze in tax thresholds.
Third, Burnham will benefit from a little-known change to the fiscal framework expected to take effect this autumn. In short, the Treasury will allow itself to run a current budget deficit of up to 0.5% of GDP three years ahead, potentially freeing up £17-18bn for day-to-day spending and/or tax cuts. That isn't to say there won't be challenges.
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