Markets broadly drifted sideways last week with no significant news flow giving direction. However, gilt yields continued lower, once again approaching historic lows on the back of a vote to hold the headline interest rate at 0.5% by the Bank of England. Further speculation was driven by comments by the Bank of England governor, Mark Carney, warning of “material economic effects” of a vote to leave in the EU referendum. There is debate over the impact on monetary policy in the event of the out vote. An out vote leading to a weaker and more fragile economy in the short term should encourage the Bank of England to lower interest rates further to spur spending and investment. However, if there is a significant impact on the value of the pound, as is being predicted, then the Bank will be compelled to increase interest rates to suppress inflation and support the currency. It is difficult to predict which of these the policy committee will prioritise.

More positive news came from Europe last week. A first quarter growth rate of 0.7% was reported by Germany, comparing favourably to a 0.3% rate in the final three months of 2015. Furthermore, this was above the 0.6% forecast by economists. Growth was driven by domestic demand rather than industrial production and exports. While quarterly GDP data can be volatile, many are now hoping that this is the beginning of a faster phase of growth for the EU as a whole, which can be maintained for a longer period. Critical to sustaining this growth will be a return to positive inflation; however, the latest reading came out at -0.1% indicating that prices are still falling. Continuing quantitative easing, rising oil and commodity prices and a faster growth rate should all positively impact this figure.

In the UK, the monthly trade deficit reached the highest level since 2008 at £13.3bn. While exports have been growing it has been at a slower rate than imports, 1.6%, and 2.3% respectively. This has been a steadily growing issue for the UK and will need to be addressed at some stage. The worst case scenario is if foreign investment flows reduce sharply causing a currency crisis. However, without a catalyst, the imbalance can be resolved over time, as indeed it has been previously.

Next week UK CPI inflation figures and retail sales are announced giving an indication of consumer sentiment in the run-up to the referendum.

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