Brexit extension & general election
The Brexit process is approaching a crucial phase: the UK Parliament is set to return on
14 October, with the next EU Council Summit a few days later on 17-18 October. We have little confidence that a deal will be reached at the summit. So we expect that on 19 October, the UK will request (and get) an Article 50 extension to the end of January 2020, as mandated by the ‘Benn Act’. Prime Minister Boris Johnson continues to insist that he will not personally request an extension, so there is a chance that this may get raised up to the court level. All in all, the next few weeks could be a very politically-volatile period.
With ‘no deal’ at the end of October 2019 likely averted – but with no clear mandate on the way forward – the UK seems likely to try to break the impasse by holding an election, probably in late November or early December.
The Article 50 extension to 31 January 2020 together with election risk (and a proposed fiscal easing) looks increasingly likely to keep Bank of England interest rates on hold into early 2020.
Against this backdrop, here is what we’re tracking – and expecting – over the next few weeks:
Interest rate cuts 2020
We continue to expect that the Bank of England will cut interest rates in 2020. However, the risk that the first move will come later than 30 January (the first Inflation Report of 2020) is increasing.
UK economic outlook
We remain cautious about the UK economic outlook, forecasting sub-trend economic growth in 2019 (1.2%) and 2020 (1.0%) – though the extra public expenditure proposed in the Spending Review will provide some support, at least in 2020.
In our view, underlying inflation pressures remain subdued, though the Consumer Price Index (CPI) is likely to remain only a little below its 2% target over the next year or two. Bank of England policymakers are likely to want to wait for some of the Brexit fog to lift before taking action.
Negotiations with the European Union (EU) continue and will centre on the backstop. While there is a small probability that a revised deal can be agreed before 31 October, it is more likely that any EU concessions that could lead to a deal being agreed and ratified will come after a General Election.
It is too early to put much weight on the polling data – given the experience of the 2015 and 2017 elections. As things stand, the latest data suggest the Conservatives would be the largest party, though seat projections are extremely varied – ranging from a hung Parliament to a Tory landslide!
Impact on sterling
We would see a broad coalition as one outcome that could deliver a sterling recovery. Another outcome – after a possible bout of weakness – is a large Conservative majority which could see the EU give ground and see an early conclusion to the Brexit impasse.
Given the importance of the General Election result, we expect voting intentions to gradually become a greater driver of sterling sentiment in the weeks ahead. As the dust settles on recent political events, any sterling recovery will depend on the appetite of international investors to purchase UK assets and UK residents to bring back money from abroad. This will to a large extent depend on the strength of the economy.