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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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BoE’s Haldane sees higher rates if UK economy ‘ticks along’ – Daily Mail

The Bank of England is likely to continue to raise interest rates gradually if the economy keeps growing, but will be “flexible” if there is a downturn, the central bank’s chief economist said in an interview published late on Wednesday.

“If the economy continues to tick along, as we expect, then we might expect some further limited and gradual rises,” central bank rate-setter Andy Haldane told the Daily Mail newspaper, repeating familiar BoE language.

The BoE raised interest rates for only the second time since the 2008-09 financial crisis in August 2018, and almost all economists expect further increases to depend on Britain avoiding a disruptive exit from the European Union in March.

“On the assumption that some deal is done, that would reduce uncertainty and, we think, cause people to take their finger of the pause button and do a bit more investment spending,” Haldane was quoted as saying.

“If the economy begins to change direction, we will be flexible in the face of that,” he added.

BoE Governor Mark Carney has previously said that a disorderly Brexit could cause sterling to slide while damaging the productive capacity of the economy — potentially boosting inflation at the same time as slowing growth.

Foreign ownership of British companies had been important in improving management practices and economic productivity more generally, Haldane said.

The BoE will publish its next interest rate decision on Feb. 7.

Source: UK Reuters

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UK inflation falls again, leaving BoE under no pressure on rates

UK inflation hit its lowest in nearly two years in December as fuel prices fell, leaving the Bank of England under no pressure to carry on raising interest rates as uncertainty over Brexit dominates the economic outlook.

Consumer prices rose at an annual rate of 2.1 percent in December, slowing from 2.3 percent in November, the Office for National Statistics said, as a Reuters poll of economists had predicted. The rise was the smallest since January 2017.

Although inflation remained just above the Bank’s 2 percent target, it was likely to fall below that level soon and there was little immediate urgency for the BoE to move, economists said.

The central bank has sketched out a range of Brexit scenarios including a worst-case no-deal outcome in which sterling would plunge to parity against the dollar, inflation would exceed 6 percent and the economy contract by 8 percent.

On Tuesday, MPs voted against Prime Minister Theresa May’s Brexit plans by a crushing margin. BoE Governor Mark Carney said on Wednesday that sterling’s rise after the vote suggested investors felt the risk of a no-deal Brexit had diminished, or that the departure process would be extended.

May faces a vote of no confidence in her government moved by the opposition Labour Party on Wednesday that she is expected to win.

“Although we think that Brexit uncertainty will keep the Monetary Policy Committee on hold for the time being, we doubt the Bank will miss out on the global tightening cycle altogether,” Ruth Gregory, senior UK economist at Capital Economics, said.

The central bank has raised interest rates twice since late 2017 and has said it plans to carry on increasing borrowing costs gradually.

Wednesday’s inflation figures could be a relief for British consumers who have been pressured by inflation since the Brexit referendum in June 2016 which triggered a slump in sterling of more than 10 percent against the dollar and euro.

Inflation peaked at a five-year high of 3.1 percent in November 2017. It has fallen since then and wages have grown at their fastest in a decade.

But businesses have reported a downturn in consumer spending in recent months, and surveys show households are worried about the outlook for 2019.

Sterling and UK government bonds were little moved by Wednesday’s data which suggested less short-term pressure in the pipeline for consumer prices, with factory input costs rising at the weakest rate since June 2016.

The ONS also said house prices in November rose by an annual 2.8 percent nationwide compared with 2.7 percent in October. Prices in London alone fell 0.7 percent, the fifth month of decline — a run last seen during the financial crisis.

Source: UK Reuters

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Pound Sterling to Rise by 5% against the U.S. Dollar in 2019 says Lloyds Bank

The Britsh Pound will rise by more than 5% against the U.S. Dollar next year, according to analysts at Lloyds Bank, as an orderly exit from the EU enables the Bank of England(BoE) to lift its interest rate again just as the Federal Reserve (Fed) brings its own tightening cycle to a close.

Pound Sterling will be volatile until the end of the first-quarter 2019, the bank says, as markets fret over whether Prime Minister Theresa May will be able to pass her Withdrawal Agreement through parliament. However, ratification of the deal early next year is forecast to see the UK exit the EU in an orderly manner.

That should enable markets and the Bank of England to address mounting inflation pressures in the economy, where a falling unemployment rate has been encouraging wage growth for workers. The BoE has already flagged this repeatedly as a likely threat to its 2% inflation target over coming years.

“The BoE has been clear in its guidance, reiterating that, should the economy progress in line with its expectations, a gradual tightening of monetary conditions would be appropriate. There is broad agreement on the MPC that this is consistent with a 25bp rate hike per year over the next three years,” says Gajan Mahadevan, a strategist at Lloyds Bank.

Mahadevan says the BoE will raise the base rate again in August 2019, taking it up to 1%, after PM May is succesful in passing her Withdrawal Agreement through the House of Commons. Meanwhile, the Federal Reserve is expected to ease off on its tightening of monetary policy.

“Among key developed market economies, the US has been the outperformer for some time. Having hit an annualised rate of 4.2% in Q2, GDP growth slowed in Q3 to a still impressive 3.5%,” Mahadevan writes. “However, there are signs that the rises in interest rates over the course of the last few years are starting to take their toll.”

Mahadevan and the Lloyds team say the Federal Reserve will raise interest rates only twice in 2019 as earlier policy tightening takes its toll on the US economy, leading the central bank to bring its multi-year cycle of interest rate hikes to a close. That would mark a turning point for the U.S. Dollar, especially against the Pound.

If the Fed stops raising its interest rate at the same times as markets are becoming willing to bet more confidently on further BoE policy tightening over coming years then it could effectively pull the rug out from beneath the U.S. Dollar.

The Fed raised its interest rate to 2.5% last week, marking its fourth rate hike of 2018, but used its so-called dot plot to signal that it will raise rates on only two occassions next year.

The Dollar index has risen by 5.2% in 2018 after reversing what was once a 4% year-to-date loss wracked up mostly during the first quarter. A superior performance from the U.S. economy was behind the move, because it enabled the Fed to raise rates as economies elsewhere slowed and their respective central banks sat on their hands.

“We expect the currency pair to rally towards 1.35 by June 2019, before settling around 1.33 at year-end. However, the high degree of uncertainty, particularly around the UK’s withdrawal from the EU, means that at this stage our conviction is low,” Mahadevan writes, in a recent note to clients.

Mahadevan’s target of 1.33 for the Pound-to-Dollar rate at the end of 2019 implies a 5.1% increase from Thursday’s 1.2657 level. However, while Sterling may easily recover lost ground from the Dollar before the end of 2019, other analysts have warned that steep losses could be likely before March 2019 comes to a close.

“We will enter 2019 with the most important aspects of the Brexit situation still unresolved. December was an enormously bad month for Theresa May,” says Stephen Gallo, European head of FX strategy at BMO. “To the detriment of the GBP, the remaining Brexit permutations appear to be declining in number.”

Prime Minister Theresa May survived a leadership challenge in December but she still lacks enough support in parliament for her Brexit Withdrawal Agreement to make it onto the statute book.

Analysts and traders have been readying themselves for a seemingly inevitable defeat of the government when the House of Commons gets its “meaningful vote” on the Withdrawal Agreement in January.

Lawmakers on all sides of the House have pledged to vote against the proposals for a variety of reasons and the PM is currently expected to lose the ballot in the Commons.

Approval before March 29, 2019 is key if the UK is to avoid leaving the EU without any preferable arrangements in March 2019 and defaulting to trading with the bloc on WTO terms.

“The first permutation is a “hard Brexit” in which the UK legally exits the EU on March 29th without a deal, forcing the country to revert to WTO rules. We would assign a 45% probability to that outcome at this stage and assume a level of $1.20 in GBPUSD if that comes to pass,” Gallo writes, in a note to clients.

Source: Pound Sterling Live

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UK inflation expectations hit five-year high – BoE

The British public’s expectations for inflation in a year’s time have risen to a five-year high but fewer people expect an interest rate hike over the next 12 months, a Bank of England survey showed on Friday.

The BoE said median expectations for inflation in a year’s time rose to 3.2 percent from 3.0 percent in August’s survey.

That was the highest since the survey published in November 2013.

Britain’s inflation rate hit a recent peak of 3.1 percent in November 2017, pushed up by the fall in the value of the pound after the Brexit vote in 2016.

The consumer price index has since fallen back to 2.4 percent but remains above the BoE’s target of 2 percent.

Expectations for inflation in two years’ time eased back to 2.8 percent from 2.9 percent in August.

Inflation in five years’ time was seen at 3.5 percent, compared with 3.6 percent three months earlier.

The survey also showed 53 percent of respondents expected an interest rate increase over the next 12 months, down from 58 percent in August.

The BoE has raised interest rates twice since November 2017 and expects to continue pushing them up gradually, assuming Britain’s departure from the European Union goes smoothly.

The BoE’s data was based on a survey conducted by polling company TNS between Nov. 2 and 6.

Source: UK Reuters

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Bank of England chief Carney backs UK PM May’s Brexit deal

Bank of England Governor Mark Carney gave his backing to a Brexit deal struck by British Prime Minister Theresa May, saying the alternative of leaving the European Union with no transition could be akin to the 1970s oil shock.

“We have emphasized from the start the importance of having some transition between the current arrangements and the ultimate arrangements,” Carney said, speaking to lawmakers on Tuesday. “So we welcome the transition arrangements in the withdrawal agreement … and take note of the possibility of extending that transition period.”

May agreed with Brussels last week on a deal for Britain’s withdrawal from the EU in little more than four months’ time. But the agreement faces stiff resistance in her Conservative Party, meaning it could fail in parliament.

The value of sterling fell sharply on concerns that Britain could leave the EU with no deal.

Carney angered many euroskeptics before the 2016 Brexit vote by warning of a hit to economic growth from a decision to leave the EU. On Tuesday he said a lack of a transition would deliver a “large negative shock” to the British economy

“This would be a very unusual situation,” he said. “It is very rare to see a large negative supply shock in an advanced economy. You would have to stretch back at least in our analysis until the 1970s to find analogies.”

An oil embargo by OPEC exporters imposed over the 1973 Arab-Israeli war and a leap in crude prices plunged many western economies into deep recessions.

Carney also said there were limits to what the BoE could do in the event of a Brexit shock to the economy, both in terms of offsetting a fall in demand and ensuring the country’s banking industry was able to continue lending.

“I think we’ve put (the financial sector) in a position … where it would dampen it,” he said. “That is not the same thing as saying it will be alright.”

Carney and other BoE officials speaking alongside him on Tuesday repeated their warning to investors not to assume that the central bank would respond to a no-deal shock by cutting interest rates, as it did after the Brexit referendum in 2016.

“That depends on the balance of demand, supply and the exchange rate… We could see either scenario,” Carney said.

He also said a planned analysis by the central bank of the economic implications of Brexit would not include a scenario in which Britain stays in the bloc.

Some of the analysis is due to be published on Nov. 28 alongside the latest bank stress tests and an assessment of Britain’s financial stability by the BoE.

Source: UK Reuters

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Brexit deal remains most likely outcome, says the Bank of England

The Bank of England predicted today that a deal remains the most likely Brexit outcome, despite ongoing uncertainty around UK and EU negotiations.

“I still think it’s the most likely outcome, but obviously over time, every day there are headlines – positive, negative – which will send the currency in particular one direction or the other,” deputy governor Ben Broadbent told CNBC.

“But for our part we have to make a particular assumption on which to condition our forecasts, that seems to me still to be the most likely outcome and that’s the one we choose.”

His comments come after former education minister Justine Greening said this morning that parliament would reject Theresa May’s Chequers deal.

Meanwhile, the Prime Minister suffered a setback after the EU reportedly rejected her proposal that the UK can decide to quit a so-called backstop agreement on the Irish border that would put the whole of the UK into a temporary customs union with the EU.

Sterling fell one per cent amid ongoing uncertainty.

In the event of a positive Brexit deal, Broadbent predicted businesses would begin to invest more after relatively weak spending since the referendum.

“If we get a good deal, a good transition, I think we can expect to see investment spending pick up, domestic demand growth pick up,” he said. “On the other hand, sterling presumably would also be stronger, and those act in different directions on inflation.”

However, the Bank predicts that the UK economy’s growth will slow in the fourth quarter, though there are signs that pay pressure is gradually building.

“The signs are we’ll have somewhat weaker growth in the fourth quarter,” Broadbent said.

But the BoE said pay pressure has been increasing, according to business surveys the Bank has conducted as well as official figures.

Wage growth hit its fastest rate since before the financial crisis in the three months to the end of August, the Office for National Statistics revealed last month, after a 40-year unemployment low helped push wages up.

“In terms of inflationary pressure we are seeing some signs of that domestically now,” Broadbent said.

The Bank monetary policy committee decided to hold interest rates at 0.75 per cent at the start of the month, in light of Brexit uncertainty, and Broadbent attempted to reassure businesses and households that rates were not going to rise quickly.

While the Bank has predicted “limited and gradual” interest rate increases, Broadbent said this wouldn’t necessarily come in the form of one rate hike a year.

A smooth transition to life outside the EU may mean that the Bank tightens monetary policy over the next three years to cut inflation to a two per cent target.

“We will do whatever we think we have to do to meet the remit,” Broadbent said. “The point of that box was to say that unfortunately either having a deal or not having a deal is not definitive in terms of the behaviour of interest rates.”

Source: City A.M.

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Sterling jumps most in nine months on Brexit news, hawkish BoE

Sterling spiked back above the 1.30 mark against the US Dollar to its highest level in over a week after investors latched onto the news that a deal between the UK and EU over financial services was close. This is a rare positive headline out of the Brexit talks since the October EU summit, which ended without an agreement. Comments from the Bank of England yesterday afternoon also suggested that the central bank could raise rates at a more aggressive pace in 2019 in the event of a smooth EU exit.

The Bank of England’s MPC voted unanimously to keep rates steady, as expected. The quarterly Inflation Report was on the hawkish side, stating that slack had fully disappeared from the economy and that inflation would remain above the 2% target during the forecasted horizon. Governor Mark Carney also stated that the MPC would keep a close eye on the impact of Brexit, stating that they may have to raise rates, even in the event of a disorderly Brexit or a ‘no deal’.

Thursday’s comments from the BoE reinforces our view that the central bank will raise rates in the second quarter of next year, after the UK’s EU exit date.

US Dollar fades on US-China trade deal optimism

The common currency also continued its impressive recovery yesterday, rallying back above the 1.14 mark against the US Dollar. This followed news out of the US that President Trump was hoping to resolve the recent trade conflict with China. According to a Bloomberg report, Trump asked US officials to begin drafting a trade deal with Beijing, with leaders of both countries expressing optimism over an agreement. Amid the trade dispute, the US Dollar rallied sharply as investors flock to safe-havens, while deem the US economy as mostly immune to trade disruption.

Today will be heavy in terms of economic indicator data. First up will be this morning’s updated PMI figures in the Eurozone, although these are expected to remain unrevised. Then we’ll have this afternoon’s US payrolls report. As always, we will be looking for signs of whether multi-decade low levels of unemployment are feeding through to higher wages.

Source: Ebury

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Bank of England hints at faster hikes, but says Brexit options wide open

The Bank of England said on Thursday that interest rates might need to rise a bit faster than investors expect, but it warned that all bets would be off if Britain leaves the European Union without a deal in less than five months.

The BoE’s nine rate-setters all voted to hold rates at 0.75 percent, as expected in a Reuters poll of economists, after raising them in August for only the second time in a decade.

Governor Mark Carney said the BoE did not expect a disruptive no-deal Brexit, but if it happened, the central bank would be in uncharted territory and it was not possible to predict if rates would need to rise or fall in response.

Brexit is dominating the outlook for the world’s fifth-largest economy which has slowed since 2016’s referendum.

“Since the nature of EU withdrawal is not known at present, and its impact on the balance of demand, supply and the exchange rate cannot be determined in advance, the monetary policy response will not be automatic and could be in either direction,” Carney told a news conference.

The BoE cut rates and ramped up its bond-buying program after the shock referendum vote. Carney cautioned against assuming it would do the same in the event of a no-deal Brexit.

Unlike 2016, inflation is above target and the BoE would be responding to actual economic damage, not a fall in confidence.

Sterling would probably fall and push up inflation. Combined with a hit to supply chains and possible trade tariffs, that would argue for raising rates, Carney said.

On the other hand, policymakers would need to balance the hit to growth from lost trade, uncertainty and tighter financial conditions. That would normally make a case for lower rates.

Sterling briefly edged up against the dollar GBP= after the BoE policy announcement and was on track for one its biggest daily gains this year due to optimism about Brexit talks and broader dollar weakness.

The BoE penciled into its forecasts the bets in financial markets that there will be almost three quarter-point rate rises over the next three years. That compared with just over one in the forecasts that accompanied August’s rate rise.

Asked whether investors were pricing in enough rate hikes, Carney pointed to the BoE’s forecast that inflation would still be above its target in two years’ time, suggesting he thought investors were being a bit too cautious about the pace of hikes.

“November’s statement makes it pretty clear the Bank of England would like to be hiking rates further,” ING economist James Smith said.

“But given that it may be quite some time before we know for sure that a no-deal Brexit has been avoided, we suspect policymakers will struggle to hike rates before May 2019 at the earliest.”

Most economists do not expect rates to rise again until the middle of next year.

CONSUMERS RESILIENT, BUSINESSES NERVOUS

The BoE said consumer spending had beaten its expectations but businesses were holding back on investment.

Prime Minister Theresa May has yet to secure a transition deal to ease Britain’s exit from the EU.

Assuming Brexit goes smoothly, the economy was likely to continue to grow by around 1.75 percent a year, the BoE said, below the rate of above 2 percent before the Brexit vote.

But the BoE said the economy was at full capacity and inflation would take three years to drop from 2.4 percent now to its 2 percent target.

The economy was expected to start running above capacity in late 2019, sooner than the BoE previously forecast, creating inflation pressure.

The forecasts did not include the stimulus from higher public spending and tax cuts in finance minister Philip Hammond’s Oct. 29 budget. Like Carney, Hammond has said he might need to review his plans after Brexit.

“The (BoE) would be minded to offset such additional demand by raising interest rates a little more rapidly than the ‘one hike per annum’ over the next three years, which it is guiding toward,” Investec economist Philip Shaw said.

Source: UK Reuters

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UK budget and Bank of England take back seat to Brexit drama

Britain’s budget announcement on Monday and a “Super Thursday” at the Bank of England would normally be key moments for the world’s fifth-biggest economy, but this time they are likely to be overshadowed by the drama of Brexit.

Finance minister Philip Hammond and Bank of England Governor Mark Carney have little option but to sit on the fence as they wait to see whether a no-deal exit from the European Union, which they warn would harm the economy, can be averted.

Both men have other business they want to get on with.

Hammond is under pressure from Prime Minister Theresa May to end a decade of austerity to see off a rise in popularity of the opposition Labour Party.

At the BoE — where an interest rate decision and economic forecasts are due to be announced on Thursday — Carney and his fellow policymakers want to progress with their plan to raise borrowing costs gradually over the coming years.

That would allow the British central bank to follow the lead of other central banks, especially in the United States and Canada, which are dismantling 10 years of massive stimulus.

Expectations of another rate hike by the U.S. Federal Reserve in December are likely to grow if the monthly payrolls report on Nov. 2 shows further jobs growth and rising pay.

In the euro zone, data on economic growth and inflation on Tuesday and Wednesday will show whether the recovery in the single currency area has kept pace.

But in Britain, with Brexit just five months away, things are much less clear cut.

BREXIT FOG

There is no sign of a Brexit breakthrough with Brussels, in large part because May’s Conservative Party is riven over how close Britain should remain to the European Union after it leaves the bloc.

“The budget is likely to be something of a holding exercise until the Brexit fog clears and the MPC is likely to remain in a state of inertia until there is a bit more clarity on the state of the Brexit negotiations,” Ruth Gregory, an economist with Capital Economics, a research firm, said.

When he stands up in parliament on Monday afternoon, Hammond is expected to use his high-profile budget speech to try to cool the Conservative rebels by dangling the prospect of higher spending in the future, as long as a Brexit deal is done.

Britain’s economy has slowed since the 2016 referendum decision to leave the EU. But it has not suffered as badly as many forecasters expected, giving Hammond some fiscal wiggle room to fund higher health spending already promised by May.

Hammond might get further help if Britain’s budget forecasters scale back their estimates of future deficits, as they have suggested they will.

But his ability to ramp up spending in other areas depends most on avoiding a new shock to the economy.

A no-deal Brexit would slash economic growth to just 0.3 percent a year in 2019 and 2020 compared with 1.9 and 1.6 percent if there is a deal, the National Institute of Economic and Social Research estimated on Friday.

Britain’s budget deficit would stop falling and would rise under a no-deal scenario, according to its forecasts.

Looking further ahead, Hammond has suggested he will need to raise taxes to help fund higher public spending.

SIGNS OF PAY “NEW DAWN”

But the prospect of getting controversial measures passed in parliament, where the Conservatives have no outright majority, is probably too daunting at a time of heightened Brexit tensions.

For the BoE, the Brexit stakes are high too.

It has begun raising interest rates from their crisis-era levels and its chief economist has said he sees signs of a “new dawn” for British workers’ pay, long the missing link in the country’s recovery from the financial crisis.

But most economists think it will wait until May to raise rates again, assuming Britain leaves the EU with a deal.

“In any other situation, we suspect the Bank of England would be looking to increase interest rates pretty soon,” ING economists said in a note to clients on Friday.

“But inevitably, Brexit remains policymakers’ number one consideration, and given that there may still be some time before we know for sure whether a deal will be in place before the UK formally leaves the EU, there is a risk growth slows as businesses and consumers grow more cautious.”

Source: UK Reuters