UK Interest rates ‘likely to rise in May’ despite Brexit

 After the Bank of England’s (BOE) policymakers released a series of hawkish signals recently, it is expected that the central bank will raise interest rates in May, but Reuters surveys show that

  Most interviewed analysts believe that in the following year, the central bank will no longer have any further action. The reality in the UK has caused a hesitation in raising interest rates. In the major industrialized countries, the British economy has been trailing from the front runners and facing the most profound changes since World War II: Brexit.

  In fact, the latest Reuters survey revealed that analysts have not made any upward adjustments to the originally estimated inflation and growth. The current general opinion is that

  There is a 20% chance of Britain’s disorderly exit from the EU, but some analysts believe this possibility has increased over the past week. The analyst’s estimate range is 5-60%. The median estimate of the likelihood of an out-of-order exit from the EU reached a high of 30% in July and October last year.

  The survey was conducted during March 5-7 and all but one analyst expected the Brexit transition agreement to be reached. Almost all respondents believe that the UK and the EU negotiated a free trade agreement is the most likely outcome. But the second possibility is that no agreement is reached, then the United Kingdom and the European Union will conduct trade in accordance with the rules of the World Trade Organization (WTO).

  Staying within the EU market and canceling Brexit completely are the third and fourth possible options.

  More than 90% of the same group of respondents said prior to the referendum on June 23, 2016, that exit from the EU would hurt the British economy, triggering a decline in the pound and pushing up inflation. All these expectations have been fulfilled. At present, the Bank of England is still working to solve the problem of excessive inflation. At present, the UK’s inflation rate is 1 percentage point higher than the central bank’s 2% target. The central bank believes this is due to the lack of economic growth potential and the fact that the unemployment rate is at a historically low level.

  Barclays economists Sreekala Kochugovindan and Fabrice Montagne pointed out that “one of the main arguments in support of this statement is that demand shows signs of increase and supply has not seen an increase. Although our main forecast scenario is still August Interest rates, the risk of the central bank ignoring weak data and raising interest rates in May is not small.”

  The Bank of England’s interest rate hike in May is by no means a foregone conclusion.

  Among the 63 respondents, 36 (57%) expect to raise interest rates to 0.75% in May. This proportion is basically the same as in February. About 60% of respondents expect the UK index interest rate to come to 0.75% at the end of the year; one-third of respondents believe that by the end of 2019, the interest rate is 1.25%, and the second and fourth quarters each have a rate hike, though Fewer respondents are willing to predict so far. They predict that the inflation rate in the United Kingdom after one year is expected to fall from the current 3% to 2.2%, an average of 2.5% this year, and an average of 2.1% next year. This is consistent with the survey in mid-February.

  Alan Clarke, head of European fixed income strategy at Scotiabank of Canada, said he maintained his usual expectations of the Bank of England raising interest rates to 0.75% in May. Clarke pointed out, “However if consumer price inflation really slows down significantly in the coming months, we fully expect this interest rate increase to be questioned.” He predicts that inflation will fall to 2.5% by March before the Bank of England The estimate is 2.8%. “As long as core service inflation, which is domestic inflation, does not fall together, it is still possible to raise interest rates in May.”

  Another Reuters survey on Wednesday estimated that

  The pound against the dollar year after the expected rise to around $ 1.41, will formally withdraw from the British EU less than a month time, which shows currency strategist at UK and EU can achieve a smooth exit from the euro and the transitional agreement optimistic. However, since the biggest economic uncertainty currently lies in the political solution of Brexit in the UK, it is difficult to predict the future by using traditional economic models, analyzing the effect of base period, and estimating idle capacity.

  Some interviewees specifically mentioned that there is still a big gap between domestic political expectations and the conditions proposed by the EU. Germany Peter Dixon Commerzbank analyst said he expected the possibility of disorderly exit from the euro in Britain is 20%. “…if the Prime Minister Theresa May and the harder side of Europe are on the same front, then the possibility of an out-of-order escape from Europe will greatly increase.”

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