Economic Observer

Julie C. Nichols General

Brexit Back in the News

Over the past week, mortgage rates were negatively affected by increasing concerns about future inflation. This was partly offset by a renewed focus on the uncertainty around the United Kingdom’s exit from the European Union. The net effect was that mortgage rates ended the week a little higher.

Since inflation reduces the value of future cash flows, it is negative for mortgage rates. A series of recent reports have hinted that inflation is rising, and two additional reports released over the past week added to these concerns. In December, the core Producer Price Index (PPI) was 1.6% higher than a year ago, up from an annual rate of 1.2% in November. Three months ago, the annual rate for core PPI was just 0.7%. Another widely followed monthly inflation report, the Consumer Price Index, showed an increase in December to an annual rate of 2.2%, up from 2.1% in November. The increase in the outlook for inflation pushed mortgage rates higher over the past week.

On Tuesday, a speech by British Prime Minister, Theresa May, on the United Kingdom’s (UK) objectives in its negotiations to exit the European Union (EU), brought Brexit back into the spotlight and caused some volatility in global financial markets. Two key issues are free trade agreements and immigration policies. According to May, the UK will not attempt to remain in the single market of the EU because it would require allowing the free movement of people between the UK and the rest of the EU. Instead, the UK will negotiate trade agreements with the EU. This is a lengthy process, and it’s difficult to predict the impact Brexit will have on economic growth in Europe. The uncertainty about the outlook for growth caused investors to shift to safer assets, including U.S. mortgage-backed securities. This added demand was good for mortgage rates.

Looking ahead, the next European Central Bank (ECB) meeting will take place on Thursday and could affect U.S. markets. In the U.S., additional information about policy changes under the Trump administration could continue to influence mortgage rates. In addition, the Housing Starts report will be released on Thursday, Existing Home Sales will come out on January 24, and New Home Sales will be released on January 26. The first reading for fourth quarter Gross Domestic Product (GDP), the broadest measure of economic activity, will come out on January 27.

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