A Tale of Two Cities and Trade Policies: Brexit No Deal Scenario and Trade Tariff Hikes

Abstract

Suggestions regarding impacts of increased and increasing possibilities of a No Deal Brexit Scenario point towards possible consequential effects on interest rate levels – to the extent of decreasing such levels to near zero levels. Brexit has not only impacted the value (exchange rate) of the pound tremendously, but also import prices. In a similar vein, current ongoing trade wars between major economies are likely to affect domestic producers particularly where produced goods are assembled (partly or to a greater extent) abroad in jurisdictions which are affected by the imposition of trade tariff hikes. It is not only likely that prices will increase but that eventual price increases will be passed onto domestic consumers – thus further raising inflation levels. Amidst ongoing uncertainty, such developments have impacted stock markets – with global reverberations and repercussions. Whilst oil import prices are also impacted by different factors such as the value of the dollar, over supply or possible cuts in production, it is not always the case that oversupply or over production automatically implies or necessarily translates into lower prices. As recently reported by the Wall Street Journal (WSJ, Aug 2019), which highlighted that “growth in oil supply is forecast to accelerate in 2020 – in a global wave of production”, it was also emphasized that this would restrict crude prices in a bear market territory – with “possible lower fuel prices” for consumers. The effects of lower interest rates on the central bank’s inflation targeting policies – as well as consumer expectations is also a subject of contentious debates. Whilst lower interest rates are needed to stimulate economic activity – even where it appears that reasons for doing so are not immediately apparent, there are also concerns that such actions may impact consumer expectations by delaying spending in the hopes of lower rates or even worse, trigger fears and concerns amongst investors. The recent decision by the Federal Reserve to reduce federal funds rate by a quarter point amidst dissenting opinions – as well as justifications that this was attributed to “boiling” trade issues which were now regarded as “simmering” not only accentuates concerns about impending ongoing trade tensions, but also reflected possible impacts on global financial markets particularly given the context and basis of the decision. What effects will near zero level interest rates have on inflation targeting policies in the months to come? Why should investors be unduly concerned that ongoing trade wars may generate greater uncertainty than anticipated? Even though chances of a No Deal Brexit Scenario have significantly increased in recent weeks, the Bank of England left interest rate levels unchanged recently (August 2019) – in stark contrast to near zero level expectations – even though it had been widely anticipated (prior to the announcement) that interest rates would remain unchanged. It will be interesting to see how such contrasting developments are justified in the months ahead.