Political chaos over Prime Minister Theresa May’s dying Brexit deal could leave interest rates on hold throughout the entirety of next year, experts claimed on Friday.
The tremors from Westminster have prompted financial markets to pare back their expectations of further action on interest rates from the Bank of England’s Monetary Policy Committee. Just 48 hours ago sterling futures markets were signalling at least one rate hike fully priced-in by the end of 2019 with a 20% probability of a second MPC move next year.
Nomura’s chief economist George Buckley said there was an 80% chance of just one rate rise next year, as the UK flirts with a potentially disastrous no-deal scenario.
“Roughly speaking over the course of the next three years, the market has taken out around half a rate hike,” said Buckley, whose central case is still that a deal will eventually be agreed and the MPC raises rates in February.
Interest rates currently stand at 0.75%, after a rate rise in August.
Bank Governor Mark Carney warned in this month’s inflation report that rates could go in “either direction” in response to a no-deal Brexit, if inflation spikes. However, other economists suggested policymakers were unlikely to carry out such a drastic move in the face of economic disruption, and could even be forced into emergency cuts.
Panmure Gordon’s Simon French said: “The Bank recently poured cold water on the idea of a rate cut next year. But MPC actions in August 2016, when they cut rates and restarted quantitative easing, are probably more valuable signals than their rhetoric. A disorderly Brexit, or a slowdown in the wider economy could easily see a rate cut by the middle of 2019.”
Berenberg’s Kallum Pickering said: “The idea the Bank would raise interest rates is a low-probability scenario. If you raise interest rates into a demand shock — if people have curbed spending because they are worried about the future — all you do is exacerbate the demand shock.”
Sterling recovered lost ground today after the turmoil of the previous session, adding more than half a cent against the dollar in spite of growing speculation of a vote of no confidence in Theresa May among Tory MPs.
“Even if she were to win the vote, it would need to be by a very wide margin for her not to be politically damaged,” CMC Markets’ Michael Hewson said.