UK: Rate Cut Expectations to be a Temporary Phenomenon - TDS

UK: Rate Cut Expectations to be a Temporary Phenomenon - TDS

According to analysts from TDS, referendum worries started to weigh on the United Kingdom economy. Ahead of the decision of the Bank of England, they expect the rate cut expectation to be a temporary phenomenon.

Key Quotes:

“The tide has started to turn on the UK economy: uncertainty and data surprises are near records, and last week’s PMI data revealed that EU Referendum worries are starting to weigh on the domestic economy.”

“Rate expectations have moved lock-step in line with trends in the polls, but as we have cautioned recently, the underlying polling data does not suggest any shift in voting intentions.”

“Conditional on a Remain win in the EU Referendum, expectation of a Bank of England rate cut is likely to be a temporary phenomenon. While growth in the second quarter is likely to be tepid at best, we do not expect the Bank of England to respond.”

“Confidence should return quickly after the June vote, and 2016H2 could post solid gains in growth.”

“The Bank of England meets on Thursday to set monetary policy, and alongside their decision they will release the quarterly Inflation Report. With the UK’s 23 June referendum on its EU membership looming large, the Bank of England is likely to play it safe, with a steady-as-she-goes Inflation Report.”

“However, recent incoming data has painted a picture of greater economic uncertainty and a sharper-than-anticipated slowdown in economic data that the Bank will find difficult to dance around quietly.

“In essence, this drives a final nail in the coffin for any policy surprises this week, and we consequently expect a straightforward unanimous vote for no change in policy. This will leave all eyes on the Inflation Report and Monetary Policy Summary for any insights on the current weakness in data.”