“At the moment financial markets are pricing in a 60% chance of an August interest rate rise from the Bank of England and this is our call too, but we see little to justify further significant policy tightening,” ING analysts argue.
Key quotes
“The UK growth story is subdued and inflation could slow more quickly than the BoE anticipates given the peak of the inflationary impulse from sterling’s Brexit-related plunge has passed, and pay pressures remain muted.”
“However, should a future UK-EU trade deal generate significant trade frictions the risks to interest rates will be increasingly skewed to the downside. If FDI starts to leave the UK then jobs will be lost and unemployment will climb. The long-anticipated pick-up in wages won’t happen and there will be a shortfall in tax receipts, pushing up government borrowing levels. In such a negative scenario we could, in fact, see the Bank reverse its course on interest rate moves, compounding the downside risks for sterling.”
“The post-Brexit outlook for UK FDI is pivotal for sterling – especially if one views the pound’s external dynamics through the prism of the UK’s basic balance. We’ve previously noted that evidence of a broad ‘sell UK assets’ theme in global markets has been limited since the Brexit referendum – and in the absence of a material breakdown in UK talks with the EU, we expect this to remain the case.”
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