With elections over and the Conservative party taking the majority, Brexit looks like a done deal for the end of January. This cleared up a lot of the uncertainty in the UK markets and saw a rally in the FTSE after the results, the question now is where is the market heading longer term.
Economic slowdowns across developed countries have see central banks cut rates and restart easing cycles near term. This is due to inflation not taking hold as many economists would have expected and the uncertainty around growth prospects. In the UK case, there wasn't a rise in interest rates as we have seen in countries like the US despite inflation staying in relative lock step over the same time periods.
If we look at the tail end of the chart, we can see that there is a sharp divergence in the two inflation metrics, but there is more to the story than simply diverging economies. After Brexit the Pound dropped drastically in value stoking inflationary pressures in the country. As the deadlines of Brexit approached at the end of October we saw more concerns from businesses and citizens in the UK so they held back on spending and investment during that period. In this time period we have seen the value of the Pound fluctuate around the 1.30 mark in dollars. While there is some merit in the currency alone causing inflation rise in the UK along side the US, it cannot be ruled out that the economy was skewed as a result of the uncertainty going into 2019. The Bank of England held off on rate increases in anticipation of Brexit uncertainty causing a slowdown in the economy, postponing rate increases in the event they would have to reverse course as a result of a no deal Brexit.
This lays out some uncertainty in the true health of the UK economy and whether the Bank of England will have to raise rates in the near term. Currently the drop in inflationary pressures and the possibility of a rising pound should allow room for the bank to hold in place. Data pointing to a sustainable rise in inflation however could cause action to be taken faster than the markets are anticipating.