UK: External financing needs remained significant in Q1 - MUFG

Derek Halpenny, European Head of GMR at MUFG, suggests that the Governor Carney and the BoE will be mindful of how aggressive they can be given the UK’s very large current account deficit.

Key Quotes

“The data for Q1 was released yesterday and was expected to show a shrinking of the deficit – that did happen but the Q4 data was revised higher and the Q1 deficit was still a very large 6.9% of GDP. The BoE will be somewhat reassured that even after the Brexit referendum was formally confirmed in February, financing of that deficit remained strong. The GBP 32.6bn deficit on the current account was insignificant when compared to the GBP 94.4bn of inflows from net portfolio and FDI inflows. Foreign investors invested through FDI GBP 38.8bn in Q1, the largest since Q1 2015.

There were some signs of investor concerns however. Foreign investors sold GBP 32.3bn worth of UK equities in Q1, which was the largest one-quarter total on record (Chart above). UK investors also repatriated foreign equity and bond holdings worth GBP 45.3bn, the largest total since Q3 2011.

The plunge in yields since Brexit (10-yr Gilt yield is down 50bps) could leave the pound vulnerable in H2 as investors consider the risk-reward scenarios after the Brexit vote.”