BOE Rate Cuts Seen in 2020 as Specter of Hard Brexit Returns
Money markets see an 80% probability of central bank cutting by 25 basis points in December 2020, up from about 30% on Friday.
(Bloomberg) -- Traders have ramped up bets for the Bank of England to lower interest rates at the end of 2020 after Prime Minister Boris Johnson reignited fears of a no-deal Brexit.
Money markets see a 76% probability of the central bank cutting by 25 basis points in December 2020, up from about 30% on Friday. While Johnson’s victory last week fueled immediate optimism for a smooth departure from the European Union, he has since announced plans to prevent Britain extending its transition period past the end of 2020, spooking financial markets.
The bets reflect concern that further Brexit uncertainty could usher in the kind of economic gloom that would help pressure the central bank to adopt a more growth-supportive policy stance. The BOE’s Monetary Policy Committee is forecast to keep rates at 0.75% at Thursday’s review, though policy makers Michael Saunders and Jonathan Haskel are expected to repeat calls for easing amid mounting signs of economic weakness.
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The last time traders saw similar odds on lower rates from the BOE in December 2020 was at the beginning of this month, when President Donald Trump suggested a trade deal with China could be delayed until after the U.S. election, which triggered haven buying of bonds.
By raising the specter of a chaotic exit from EU once again, Johnson has piled fresh pressure on the pound, which fell a second day on Wednesday after surging on his election victory. The result triggered initial market euphoria on signs Britain could leave the bloc on time on Jan. 31 and begin further talks with Brussels without fear of defaulting to trade on World Trade Organization terms. Johnson now plans to change the law to ensure the transition phase is not extended.
Deutsche Bank AG predicts the BOE could cut rates as soon as January then remain on hold, although risks of further cuts cannot be discounted.
“Persistent Brexit uncertainty, falling growth, weaker supply dynamics, namely with regards to the labor market and inflation, and a tighter policy stance should pave the way for a rate cut,” economist Sanjay Raja and macro strategist Oliver Harvey wrote in a client note. “We think recession risks are understated with the economy already showing signs of a downturn.”
Signs have been emerging in recent days that the economy could be heading for further trouble. U.K. inflation held at its lowest rate in three years in November, the Office for National Statistics said, encouraging interest-rate doves as the central bank prepares to announce its final decision of the year. Factories posted the weakest performance in more than seven years in December, increasing the chances that the economy will shrink in the fourth quarter.
To contact the reporter on this story: James Hirai in London at jhirai3@bloomberg.net
To contact the editors responsible for this story: Dana El Baltaji at delbaltaji@bloomberg.net, William Shaw, Anil Varma
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