Brexit uncertainty

Slower growth, led by Brexit uncertainty and modest inflation, will prevent the BoE from raising rates despite the statements to the contrary from the Monetary Policy Committee (MPC) over the past year. 

It is tempting, when looking at domestic factors such as house prices, retail sales and industrial production, to conclude that the change in stance is solely reflective of the slower domestic growth driven by Brexit uncertainty. 

However, it is clear that exogenous factors have also been in play since the start of the year with rising protectionist rhetoric with regards to trade and weaker global growth contributing to a change in tack by the MPC as growth forecasts for this year and next have been downgraded. 

The BoE is also in the unenviable position of having to set monetary policy against a backdrop of uncertainty over our future relationship with Europe, as well as the increasing risk of a “no deal” Brexit, a potential general election, and a government seeking to loosen the fiscal purse strings regardless of how things play out with Europe. The change in tack from austerity to fiscal stimulus, regardless of Brexit, is particularly challenging when the BoE still appears to have sympathy with the view that the UK remains close to trend growth and full employment.   

25bps cut by year-end

Our base case remains a 25 bps cut by year-end, reflecting the need for an ‘insurance cut’ given current domestic conditions, regardless of Brexit outcome.

If we do leave the European Union, I would expect a comprehensive package of both monetary and fiscal loosening that may be positive for UK government bonds and UK risk assets in the short-term, but the more medium-term outcome remains highly uncertain. 

Sajiv Vaid

Sajiv Vaid

Co-Portfolio Manager, Fidelity MoneyBuilder Income Fund