Articles and Whitepapers

This morning’s announcements from the Bank of England cannot in any way be tagged as not going far enough as a pre-emptive response to a potential national and global emergency.

The COVID-19 virus and the prospects for containment or risk of global pandemic is front and centre for world markets. There is considerable debate as to whether this represents a demand shock or supply shock, in our view it's more likely both. As more cases begin to emerge in more developed economies such as South Korea and recently Italy, the potential impact becomes more palpable for both business output and consumer confidence.

The Bank of England's potential to signal any shift in policy stance due to the downshift in future indicators and inflation has been deferred by the calling of an “emergency” general election. Nonetheless, economic sentiment has fallen to its weakest levels since the 2016 referendum and it is not clear how long the UK consumer can continue to prop up the UK economy. We expect the Bank to downgrade growth and inflation forecasts, leaving the door open to easier policy in the New Year.

The Bank of England may attempt to send a message of near term optimism at its May meeting, perhaps steering the market towards a slightly higher probability of another rate increase in 2019, but we still see the likelihood of an actual increase in rates as remote until current Brexit uncertainties are resolved.

As the clock ticks down towards the Article 50 deadline of March 29th, longer-term U.K. interest rates find themselves pretty much back where they were before the Bank of England decided to lift base rates from 0.25% in November 2017. The entire 5-year curve premium barely reflects a single interest rate increase, but for reasons that extend well beyond Brexit uncertainty.