UK: More rate hikes post Brexit deal?

3 min
Ana Boata
Ana Boata Senior Economist for Europe

At the Bank of England (BoE) meeting last Thursday, there was a unanimous vote to keep interest rates unchanged at 0.75% and maintain the stock of gilt and corporate bond purchases at GBP435bn and GBP10bn, respectively. The BoE signaled a faster pace of interest rate hikes should a Brexit deal be signed by March 2019. The pound registered its biggest rally in around 18 months as expectations for two rate hikes started to be priced in by markets. While we assign a 70% probability for a last-minute Brexit agreement by January 2019, we doubt the economy will accelerate as expected by policymakers. The remaining uncertainty regarding the trade deal after the 21-month transition period will weigh on corporate investment and be a drag on the GBP. This coupled with the global slowdown is expected to bring UK GDP growth to +1.2% in 2019 (from +1.3% in 2018) against +1.7% expected by the BoE and +1.6% by the Office for Budget Responsibility. Hence, the state of the economy is likely to be conducive for only one +25bp rate hike in Q2 2019.