Wed. Jan 27th, 2021

UK inflation at three-year low despite rising chocolate prices – business live

Rolling coverage of the latest economic and financial news


1.44pm GMT

Speaking of the Bank of England… the central bank has outlined new climate emergency stress tests.

They will examine whether UK banks and insurance companies are prepared for the impact of climate change. It will consider a range of scenarios, including temperature rises of up to 4 degrees celsius (double the Paris climate agreement). More here:

Related: UK banks and insurers to be tested on climate crisis response plans

1.06pm GMT

Professor Costas Milas of Liverpool University argues that UK interest rates are likely to be cut next year – whether Brexit goes smoothly or not.

He writes:

Under the current interest rate of 0.75%, the Bank expects inflation to be 1.42% in late 2020. Under one interest rate cut, inflation will be 1.51% by the end of 2020. All this, based on the assumption that the sterling effective rate settles at the 79 level in 2020.

Notice that sterling went up to 82 in the aftermath of the election result. Assuming that Brexit-related negotiations run reasonably smoothly in 2020, sterling will rise further therefore pushing inflation further below the Bank’s forecast and the 2% target. In this case, the Bank will surely react by cutting the policy rate.

Even if Brexit negotiations involve a lot of ups and downs, the BoE will most likely be forced to cut the policy rate. In this case, uncertainty will spiral out of control. Indeed, we got a taste of this following Boris Johnson’s move to legislate against extending the end of 2020 deadline which is, of course, a huge gamble.

So whatever Brexit scenario one is willing to contemplate, an interest rate cut looks as the most likely outcome..

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