UK: Uncertainties associated with Brexit could derail BoE tightening plans - Wells Fargo
Analysts from Wells Fargo, look for inflation in the UK to recede as the one-off effects of currency depreciation run their course.
“The value of the British pound weakened significantly in the immediate aftermath of last year’s Brexit referendum, which then caused the CPI inflation rate to shoot above the BoE’s target of two percent. Rather than tighten policy, however, the MPC decided in August 2016 to cut its main policy rate by 25 bps. The MPC reasoned that economic weakness, which it expected in the quarters after the Brexit referendum, could eventually cause the CPI inflation rate to undershoot the two percent target. But the economy has not weakened as much as the MPC had feared, so it
recently took back that rate cut.”
“We look for the CPI inflation rate in the United Kingdom to slowly recede back toward the two percent inflation target in the quarters ahead as the price-lifting effects of sterling depreciation fade. If, as we expect, the economy continues to grow, then we believe that the MPC will feel confident enough to raise rates again next summer. Looking further ahead, we forecast two 25 bps rate hikes in 2019.”
“That said, the U.K. economic outlook is held hostage, at least in part, to uncertainties associated with the Brexit negotiation process. Unfortunately, it is essentially impossible to accurately predict the outcome of that process at this time. But if these uncertainties cause businesses to retrench via lower investment and/or cuts to payrolls, the British economy could weaken further. In that event, prospects for further monetary tightening in the United Kingdom would fade.”