Brexit Balance Shifting?
The battle over the Brexit timeline is intensifying. Brexit Secretary David Davis is “not really interested” in a deal that would allow a longer period to manage the Brexit adjustment than the 2 years set by Article 50. Chancellor Philip Hammond responded, “there is, I think, an emerging view… among thoughtful politicians” that some form of transitional deal would “run less risk of disruption”. BoE Governor Carney agrees and PM Theresa May has said she is wary of a “cliff edge”. EU lead negotiator Barnier seems open to the idea of extending talks. This reduces the risk of a “hard” Brexit happening in 2019.
The Bank of England’s move to a “neutral” stance on the path of policy, combined with a sharp rise in inflation and economic resilience, has lifted market expectations for a 2017 rate hike. We are looking for inflation to rise above 3% in 2017, but that’s much lower than when CPI peaked above 5% in 2008/11. The BoE “looked through” price rises then and we suspect it’ll do the same now. UK growth risks are a higher priority. Brexit-related uncertainty is leading to big falls in business surveys regarding investment and hiring plans. Taken together with the squeeze on household incomes, lower corporate and consumer spending poses downside risks to growth next year. That’s why we still think a rate cut is much more likely.