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Bank of England hints at rate hike under orderly Brexit

The Pound managed to eke out some gains against its major peers on Thursday, after the BoE hinted that it could raise interest rates in the UK, should Theresa May manage to force a Brexit deal through parliament.

Communications out of the BoE yesterday were fairly mixed. Sterling had initially fallen after Governor of the Bank of England Mark Carney talked up the downside risks to growth posed by Brexit. Policymakers slashed their GDP growth forecasts for this year to just 1.2% from the previous 1.7% estimate. Carney also stated during his press conference that under a worst case ‘no deal’ Brexit, there would be a sudden loss of confidence in the UK among foreign investors, which could send the UK into recession.

Losses for the UK currency were, however, quickly reversed after Carney opened the door to an interest rate hike later in the year. Carney said that the markets were right to keep the possibility of a hike on the table and that the UK economy would rebound under a softer Brexit.

We think that the upward move in the Pound is indicative of the general optimism that markets currently have regarding an eventual passing of the Brexit deal. Under our base case scenario of a delayed, albeit successful and somewhat orderly EU exit, we still think that the Bank of England will raise interest rates towards the end of this year. This would be unambiguously positive for the Pound.

Euro sell-off continues on weak German data

The Euro continued on its gradual path of depreciation yesterday, edging towards the 1.1325 level against the US Dollar this morning for the first time in two weeks.

The sell-off that we’ve witnessed in the EUR/USD rate this week can largely be attributed to the recent soft economic data out of the Euro-area. German industrial production numbers out on Thursday were particularly troublesome. Output in the industrial sector of Europe’s largest economy contracted again in December by 0.4% and by a sizable 3.9% year-on-year (Figure 1).

Retail sales in Italy, which entered into its first recession in five years in Q4 2018, also came in negative, while the European Commission once again downgraded its growth forecasts for the Euro-area’s economy. The EC now expects the bloc to expand by just 1.3% this year, down from 1.9% last year. This is considerably below the levels that are conducive of higher interest rates from the European Central Bank.

Figure 1: German Industrial Production (2012 – 2018)

Source: Thomson Reuters Datastream Date: 07/02/2019

Today looks set to be a relatively quiet one in terms of economic news, with no major releases scheduled out of the US at all today. We will instead tentatively turn our attention to major US news out next week, namely the delayed US inflation and retail sales numbers. If, as much of the market expects, data out of the world’s largest economy begins to turn south, we could see the EUR/USD rate retrace some of its losses in the coming sessions.

Source: Ebury

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Bank of England slashes UK growth forecasts amid Brexit uncertainties and global slowdown

The Bank of England today decided to leave interest rates unchanged as expected, but slashed UK growth forecasts as Brexit uncertainties mount.

The bank’s monetary policy committee (MPC), which last raised rates to 0.75 per cent in August last year, unanimously voted to hold interest rates for a fourth consecutive meeting.

The MPC said a UK economic slowdown in late 2018 “appears to have weakened” at the beginning of this year, citing softer activity abroad and greater effects from Brexit uncertainties.

It cut growth forecasts for 2019 to 1.2 per cent of GDP, down from its previous 1.7 per cent forecast in November.

It would be the weakest expansion since 2009.

The bank’s governor Mark Carney said business investment would soften further “before picking up sharply once the fog clears.”

Carney added that a “rapid decline in certainty” could push growth up by 0.5 per cent on its forecasts.

The growth outlook for 2020 was also trimmed to 1.5 per cent, from 1.7 per cent.

Sterling fell 0.41 per cent following the Brexit warning and lowered forecast, from $1.293 to $1.287, but has since surged up to $1.294 and 1.14 against the euro.

The committee said: “UK economic growth slowed in late 2018 and appears to have weakened further in early 2019.

“This slowdown mainly reflects softer activity abroad and the greater effects from Brexit uncertainties at home.”

It added that the economic outlook “depends significantly” on the nature of Brexit, specifically new trading arrangements and whether the transitions is smooth or abrupt.

In the minutes of its meeting, the MPC said: “Since the Committee’s previous meeting, key parts of the EU withdrawal process had remained unresolved and uncertainty had intensified.

“Businesses had appeared increasingly to be responding to Brexit-related uncertainties, and there were some signs that those uncertainties might also be affecting households’ spending and saving decisions.”

The MPC also unanimously voted to maintain its stock of UK government bond purchases at £435bn and its stock of corporate bonds at £10bn.

City A.M.’s shadow monetary policy committee unanimously voted to hold interest rates ahead of today’s meeting.

The panel of City economists cited “peak Brexit uncertainty” and the possibility of a continued global slowdown as reasons to leave the rate unchanged.

They noted that the UK labour market remained robust but that a global softening indicated caution.

This month’s guest chair, Tej Parikh, an economist at the Institute of Directors, said: “The speed of travel for interest rate hikes remains inextricably linked to what happens on 29 March. Right now, uncertainty is checking domestic demand.

“Businesses have been shelving investment plans, and consumers are also tightening their belts as Parliament remains in deadlock.

“Meanwhile, a potential global slowdown is adding a downside risk to the U.K.’s future economic growth.”

Source: City AM

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First Brexit, now global slowdown to weigh on Bank of England

The Bank of England will have more than Brexit on its mind when it meets next week, as a slowdown in the global economy tests its plan to return to raising interest rates before too long.

Governor Mark Carney and his fellow interest rate-setters are expected to keep borrowing costs on hold at 0.75 percent on Thursday, with Britain at risk of leaving the European Union just 50 days later without a transition deal in place to ease the shock.

Prime Minister Theresa May, trying to placate lawmakers in her Conservative Party, is pushing for concessions from EU leaders on a key part of the Brexit deal that she agreed with them last year. That is something the bloc has said it will not do.

On top of the uncertainty about the Brexit stand-off, the loss of momentum in the world economy and in particular in the biggest EU countries is likely to exert a drag on Britain’s stumbling economy.

On Wednesday, the U.S. Federal Reserve signalled its three-year run of raising rates might be ending, and the European Central Bank has sounded more worried that the euro zone’s recovery has run out of steam.

“Is the global slowdown just temporary? We think so, but it has lasted quite a long time. Maybe we are at the peak of the cycle,” George Brown, an economist with Investec, said. “Perhaps that’s the view that the BoE takes, although it’s not our view.”

The BoE – which bases its forecasts on the assumption of a smooth Brexit – will try to balance the drag on Britain from a weaker global economic outlook with the potential boost from finance minister Philip Hammond’s relaxation of his grip on public spending.

The BoE’s forecasts for Britain’s economic growth might therefore be little changed when it publishes its quarterly Inflation Report alongside its decision on rates on Thursday.

But some economists say there is a chance of a higher inflation forecast that makes investors rethink their bets against a BoE rate hike until the end of 2019 at the earliest.

Although inflation has fallen to within a whisker of the BoE’s 2.0 percent target, the wages of British workers are rising at their fastest pace in a decade, surprising the BoE and potentially pushing up prices.

A minority of economists think one member of the nine-strong Monetary Policy Committee will vote for a rate hike next week.

That, plus the chance of the BoE turning even more pessimistic about the inflationary “speed limit” of Britain’s low-productivity economy, “would set the UK apart as a hawkish story in an increasingly dovish world,” HSBC economist Elizabeth Martins said. “It might come as a surprise to the market.”

By the time the MPC announces its next policy decision on March 21, a few days before the scheduled Brexit date of March 29, the picture could look very different.

By then it should be clearer if the United States and China have avoided the prospect of a trade war, and – more importantly for the BoE – whether Britain will avoid a damaging no-deal Brexit, at least in the immediate future.

The BoE has warned that a worst-case Brexit scenario could hurt Britain’s economy more than the global financial crisis.

Paul Dales, an economist with Capital Economics, said a deal on Brexit could lead to the unusual situation of the BoE raising interest rates at a time when the U.S. Fed is cutting them.

“It doesn’t happen often, but nor does Brexit,” he said. “Yes, the global economy seems to be turning. But the BoE has room for catch-up.”

Source: UK Reuters

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Sterling resilient as Britain pursues Brexit deal change

Sterling recovered on Wednesday after declines triggered by the UK parliament’s rejection of amendments to delay Brexit, as investors bet the government would still avoid exiting the European Union without an agreed divorce deal in place.

Growing expectations that Britain can avoid a no-deal Brexit have fuelled a 3 percent rally in the pound this month against the dollar and the euro.

But sterling fell 0.7 percent on Tuesday after lawmakers voted to demand Prime Minister Theresa May renegotiate the terms of Britain’s exit and they rejected an amendment that would have postponed the scheduled departure date of March 29.

However, lawmakers also approved a non-binding amendment that said Britain should seek to avoid a no-deal Brexit, and analysts said the risk of such a disruptive exit had risen only slightly. Goldman Sachs, for example, put the chances at 15 percent compared with an earlier 10 percent forecast.

By 1635 GMT, sterling was flat at $1.3070, roughly a cent below where it traded before Tuesday’s vote.

Against the euro, the pound rose around 0.15 percent to 87.4 pence.

Traders are trying to figure out whether May’s Conservative Party rallying around her has increased the chances of her securing concessions from the EU – which would likely boost sterling – or has pushed Britain toward further deadlock and uncertainty.

The currency had gained before the vote on expectations that parliament would approve a divorce deal on time or would extend the Article 50 deadline of March 29. Analysts said not much had changed on that front.

“The market is still giving a very low probability to a no-deal,” said Sarah Hewin, chief Europe economist at Standard Chartered, which still sees chances of hard Brexit at 20 percent. “The sense I get is people feel that is a negligible prospect.

“But chances of an extension to Article 50 are rising. That probability is looking more likely than not with each day that goes by.”

Analysts at BNP Paribas agreed, advising clients to stay long sterling and seeing a Brexit delay as “inevitable”.

The renewed uncertainty caused money markets to reduce expectations that the Bank of England would raise interest rates in 2019. The probability is now only 52 percent, compared with 64 percent on Tuesday before the vote.

“The market is taking the view that as long as Brexit uncertainty persists it’s going to be difficult for the BoE to raise rates. As we are now in the realm of extending Article 50, it means uncertainty is also extended and that’s the rationale behind the pricing,” Hewin said.

Source: UK Reuters

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Bank must make right call on interest rates if no-deal Brexit, Mark Carney says

The Bank of England governor says ‘it’s not automatic which way policy would go’ if Britain crashes out of EU.

Interest rates will not automatically go up or down if Britain crashes out of the European Union without a deal, the governor of the Bank of England has said.

Speaking at a panel at the World Economic Forum in Davos, Mark Carney said: “It’s not automatic which way policy would go in the event of a hard Brexit.

“And we’re remembering that we’re not predicting that, but we’ve got to be prepared for that”.

MPs are set for another crunch vote on the Prime Minister’s so-called “Plan B” Brexit deal on January 29, exactly two months away from Britain’s scheduled departure from the EU.

Theresa May’s first deal was rejected by Parliament by a majority of 230.

He said if the UK goes “through a period of de-integration, de-globalisation and reduction in trade openness” it would be “akin to a supply shock to the economy” with both demand and supply declining and currency and tariff pressures on inflation.

In those circumstances, he said the Bank “has to make the right judgment about the right path of bringing inflation back to target while doing what it can to support. But it is not an automatic approach.

“Particularly at times when there are big changes, you have to have some constants and for a central bank there are two constants: have a financial system that functions, which we would have if that were to happen, and keep your focus on your democratically given mandate, which is to achieve the inflation target.”

Inflation last month fell to 2.1%, within touching distance of the Bank’s 2% target.

Mr Carney also said that British businesses cannot completely prepare for a no-deal Brexit due to a lack of infrastructure at UK ports.

“There are a series of logistical issues that need to be solved, and it’s quite transparent that in many cases they’re not.

“So, port infrastructure is not there, border infrastructure is not there to the extent that it would need to be from jumping from an absolutely seamless trading environment to one with frictions that aren’t just tariffs, but are rules of origin of products, safety standards and other inspections that would need to be done.

“There is a limited amount businesses can do to prepare if there are going to be substantial delays on the logistical side”.

He used the example of logistics and supply issues that could arise for UK carmakers from a no-deal Brexit.

“If you are a car plant that relies on 40 18-wheelers [trucks] coming through Dover a day, and they have to show up within minutes of each other in order to meet the just-in time-requirements of the plant, you can’t stack things up all over Wales in order to ensure that you can continue to run it for months. That’s just reality.”

At the panel, the audience was asked for a show of hands to indicate if they were in favour of a second Brexit referendum. Mr Carney abstained, but UBS boss Sergio Ermotti raised his hand.

Source: Shropshire Star

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No deal Brexit could see interest rates cut

The rejection by Parliament of the government’s Brexit deal could see interest rates cut, according to Richard Buxton, who runs the £1.7bn Merian Global Investors UK Alpha fund.

Last night (January 15) the Prime Minister faced a landslide defeat as her Brexit deal with the EU was rejected by MPs with 432 votes to 202.

Mr Buxton said: “If a deal can ultimately be agreed, I believe we may see the Bank of England hike policy interest rates up to three times over the course of 2019.

“Conversely, if the UK does leave the EU without an agreement, I would expect the Bank’s Monetary Policy Committee to move rapidly to cut interest rates from their already-low levels. The resumption of monetary stimulus, in the form of quantitative easing would, in my view, be a possibility.”

Central banks typically cut interest rates when they expect economic growth to slow.

David Zahn, head of European Fixed Income at Franklin Templeton, said markets crave certainty above all else, and so may welcome a no deal Brexit outcome as preferable to further delays.

He said: “The impact of such an outcome would be significant, but we don’t think a Hard Brexit would necessarily be the end of the world. In many ways, it could offer the quickest route to the certainty that markets crave.

“A no-deal Brexit would likely mean heightened levels of uncertainty for three to six months as things get worked out. In many areas, the EU has said it will extend the status quo ante for the next year while the two sides adjust to the new environment.

“The initial response would likely be negative: we’d expect bond markets to rally significantly; gilts would probably revisit their historic lows. But our perception is that if a Hard Brexit were confirmed, things could only get better.”

Saker Nusseibeh, chief executive at Hermes Investment Management, said: “We are watching closely to understand the secondary effects on stocks and currencies, inclusive of sterling, and the specific industries that are tied to frictionless trade.

“Most people would prefer to see an end to uncertainty. However, the sad truth is that continued uncertainty has prevailed, and there appears to be no clear plan B.”

Sterling rose by 0.05 per cent to $1.287 in the aftermath of the vote, after declining by more than 1 per cent earlier in the day.

The FTSE 100 has been 0.17 per cent lower since it opened this morning (16 January) but the shares of some companies exposed to the UK domestic economy, such as the retailer Next and Lloyds Banking Group, were up more than one per cent on yesterday’s closing price.

Source: FT Adviser

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Leave voters think falling house prices and higher interest rates are a price worth paying for Brexit

Falling house prices and higher interest rates are a price worth paying for Brexit, according to many Leave voters.

Research by YouGov found that various ‘worst-case scenarios’ predicted by the Bank of England were seen as being worth it in the minds of Leave voters.

According to The Times, 56% of Leave voters said interest rates rising to 4% would be a price worth paying for Brexit, compared to just 16% who don’t.

Brexiteers were also more likely to see falling house prices as a price worth paying, at 52% versus 20%, according to the report.

But they were split on the warning that unemployment could rise, with 35% seeing it as a price worth paying and 35% thinking it’s not a price worth paying.

The same went for the value of the pound falling (34% on both sides) and inflation rising (36% thinking it would be a price worth paying and 32% saying not).

YouGov quizzed people on individual worst-case scenarios set out by the Bank of England.

But its research also suggested that Leave voters are less likely to be worried about the scenario than Remainers.

According to The Times, while overall 77% of Brits think the Bank of England’s project rise in unemployment to 7.5% would be a bad thing – this works out at 69% or Leave voters, compared to 91% of Remainers.

And while just 1% of overall Britons see a GDP drop to be a good thing, it works out at 16% of Leave voters compared to 4% of Remain voters.

Source: Yahoo News UK

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Sterling to make solid gains this year if Brexit path smooth – Reuters poll

Sterling is likely to gain more than 8 percent this year — assuming Britain and the European Union part ways amicably, according to a Reuters poll of foreign exchange strategists.

The pound has largely been ignoring economic data, instead swinging wildly on any snippet of news about Britain’s departure from the EU in less than three months.

While it has showed some strength to start the year, that is largely down to dollar weakness. Its performance against the euro has been more muted.

With only a short time left, the Brexit outcome remains uncertain. British lawmakers are expected to vote next week against a Brexit agreement Prime Minister Theresa May struck with the EU in November.

May’s government suffered a defeat in parliament on Tuesday when lawmakers who oppose leaving the EU without an accord won a vote creating a new obstacle to a no-deal Brexit.

On Wednesday, May failed to win over the Northern Irish party which props up her government and then lost a vote which means she has a shorter period of time to come up with an alternative plan if she is beaten next week.

A November Reuters poll said sterling would rise around 5.5 percent in the event of an amicable split but fall over 6 percent if there is a hard Brexit.

Still, there is only a median 25 percent probability of a disorderly Brexit, a Reuters poll predicted last month. Almost 90 percent of economists surveyed expect a free-trade deal between the two sides. [ECILT/GB]

Those economists also mostly expect the Bank of England to raise interest rates by 25 basis points to 1.0 percent as soon as April, which would support the currency.

Ongoing doubts about the health of the world’s two biggest economies – the U.S. and China – as well as a trade war between them that’s hurting growth have raised questions about how high U.S. interest rates will go this year.

The dollar’s rally is largely over, according to about two-thirds of the currency strategists polled by Reuters. They said dialling back rate hike expectations has diminished the dollar’s strength. [EUR/POLL]

On Wednesday, the pound rose towards $1.28 after reports May was attempting to win over the Northern Irish Democratic Unionist Party in next week’s crucial vote but dropped when she failed.

Sterling also rallied on Tuesday following reports British and European officials were discussing the possibility of extending the formal exit process amid fears a Brexit deal will not be approved by March 29.

In a month, sterling will be little moved from Wednesday’s levels, trading at $1.27. When Britain and the EU part ways it will have strengthened to $1.30. By mid-year it will have climbed to $1.32 and at year-end it will be over 8 percent higher at $1.38.

“Ultimately, we assume the removal of the current Brexit uncertainty, which will prompt a period of pound appreciation as the year unfolds,” noted analysts at MUFG, who expect a sterling rally to $1.43 by year end.

However, that 12-month median forecast is still lower than the $1.50 sterling was hovering around before the June 2016 Brexit referendum. Only three of 66 analysts with 12-month forecasts expected it to strengthen past that.

Highlighting the uncertainty around the pound’s future, the 12-month forecast ranged from $1.22 to $1.59.

Against the euro, the pound will make modest gains. On Wednesday, a euro was worth about 90.0 pence. In six months, forecasts are for 87.0p and in a year 86.5p.

Source: UK Reuters

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Former top Bank of England official calls Brexit economists ‘charlatans and crackpots’

A former top official at the Bank of England has claimed most economists’ work is irrelevant, and said it allowed “charlatans and crack pots” to fill their place in the debate over issues like Brexit.

Danny Blanchflower tweeted that it was “hard to see the relevance of most of economics”, saying 95% of papers he saw were on subjects that few people cared about or which “failed to make the world better.”

Blanchflower then told Yahoo Finance UK the profession was too focused on publishing in major but not widely read journals, rather than seeking to answer critical questions.

The economist, a former member of the Monetary Policy Committee which sets UK interest rates, said economics’ reputation suffered as a result of its failure to predict the financial crisis, partly because it had been dominated by “third-rate mathematicians who knew nothing about the real world.”

Many economists had begun to use more empirical rather than theoretical work, he added, but were using narrow experimental methods which “precisely answer narrow questions that nobody cares about very much.”

He said: “My view is that economics has lost its way. I did some work looking at the top five journals and ten years later most papers are hardly cited, and especially so in theory.

“As a policy maker I look at the papers that are published weekly and say to myself, ‘Who is this aimed at, which policy maker in the world cares and how would this improve the human condition one jot?’ The vast majority fail these tests.”

“This leaves the major issues of the day, especially in macro-economics, open to charlatans and fools. A good example in the UK is some of the economists supporting Brexit, who are a bunch of charlatans and crackpots,” he said.

It is not the first time economists in favour of Brexit have come under fire, with the Economists for Brexit group accused of publishing a “doubly misleading” study last year.

Their report was the only economic model to show material benefits from a no-deal Brexit, but the modelling used was condemned by several leading economists.

But mainstream economists have also drawn increased criticism over the past decade since the financial crisis, though heavy attacks from former influential government figures like Blanchflower are less common.

In 2016, the Conservative MP Michael Gove, now environment minister, refused to name any economists who had endorsed Brexit, famously claiming that “people in this country have had enough of experts”.

US president Donald Trump also allegedly considered sacking Chair of the Federal Reserve Jerome Powell, who he appointed in February 2018, as the S&P 500 entered a bear market last week.

Source: Yahoo Finance UK

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Bank of England keeps interest rates on hold amid Brexit slowdown

The Bank of England has kept interest rates on hold at 0.75 per cent as it cautioned “intensified” Brexit uncertainties were slamming the brakes on UK growth.

Policymakers on the bank’s nine-strong Monetary Policy Committee (MPC) voted unanimously to keep rates unchanged in its last decision of 2018.

The bank said no-deal Brexit fears had “intensified considerably” since its last meeting and these were hitting financial markets, bank funding costs and the pound, as well as the wider economy.

The bank warned internal estimates suggested UK growth was set to slow by more than previously expected to 0.2 per cent in the final three months of the year, down sharply on 0.6 per cent seen in the heatwave-boosted third quarter.

It added growth was likely to remain around that level in the first three months of next year. This was worse than first feared by the bank, which said in November that growth was likely to slow to 0.3 per cent in the fourth quarter and recover to around 0.4 per cent thereafter.

In minutes of the rates meeting, the bank said: “The further intensification of Brexit uncertainties, coupled with the slowing global economy has also weighed on the outlook for UK growth. “Business investment has fallen for each of the past three quarters and is likely to remain weak in the near term.”

The housing market has remained subdued and retail spending was showing signs of slowing, the bank said. But the bank said it had looked to separate the “shorter-term developments” from the dynamics of the economy.

It reiterated that, assuming the economy grew in line with forecasts and assuming an orderly Brexit, rates would likely need to rise by a “gradual pace and to a limited extent” to bring inflation – currently running at 2.3 per cent – back to target.

It also stands ready to respond to the fallout from Brexit, warning once more than rates could go “in either direction” even in a cliff-edge withdrawal. Agriculture co-op to create Aberdeen business hub Just weeks ago, the bank warned in its Brexit scenario analysis that Britain could be tipped into a recession worse than the financial crisis in the event of a no-deal disorderly Brexit.

Governor Mark Carney has insisted that rates could go up or down after a cliff-edge Brexit, with the bank’s analysis warning they might be hiked to 5.5 per cent if a further fall in the pound sends inflation soaring. In the controversial documents requested by the Treasury Select Committee, the bank predicted the worst-case scenario could see GDP fall by 8 per cent, the pound plunge by 25 per cent and house prices tumble 30 per cent.

The minutes of the latest MPC meeting also flagged up slowing global growth, particularly in the euro area where it said the slowdown had been marked.

But it said Chancellor Philip Hammond’s recent Budget announcements would offer a boost to GDP, forecasting these would add around 0.3 per cent over the next three years.

The Bank also offered some cheer to households as it said current internal estimates saw inflation, which eased back to 2.3 per cent in November, dropping further to around 1.75 per cent in January thanks to lower fuel prices and Budget measures.

Inflation would also remain below the 2 per cent target for the following three months before picking up later in 2019. On the outlook for rates, Andrew Goodwin, an economist at Oxford Economics, said: “It is virtually inconceivable that the committee will move this side of March 29.”

He added: “We expect the acceleration in wage growth to peter out in the new year and, with inflation set to drop some way below target, we think that the Committee will struggle to sustain its hawkish rhetoric. “We continue to forecast one 25 basis point rate hike in 2019, with the risks skewed towards policy remaining on hold all year.”

But Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said if a deal is agreed, the Bank “won’t waste any time to raise interest rates”.

“We continue to think that the MPC won’t wait for signs of a recovery to emerge in the data and will raise bank rate to 1 per cent in May, once MPs have signed off a Brexit deal late in the first quarter,” he said.

Source: Scotsman