Investment Clock insights

Further rate hikes depend on Brexit


Trevor Greetham, Head of Multi Asset 

2 November 2017

It's not often you can say that interest rates doubled today. Rate hikes are never popular with borrowers, but with base rates at only 0.5% and inflation at 3% there will be little pushback. We expect the Bank of England to wait and see before making further changes. As the Bank made clear in their statement, Brexit is still the elephant in the room and there are considerable risks to the economic outlook and to sterling, which sold off in the aftermath of the announcement. 
Nearly eighteen months on from the referendum, all options remain plausible. It's hard to imagine a continued tightening of monetary policy in a disruptive no deal outcome, and in this scenario sterling could easily fall another 10 to 15%. On the other hand, if permanent single market membership becomes likely, or if we see a reversal of the decision to leave the EU, the Bank of England would be comfortable raising rates further. In this case, sterling would probably rise 10 to 15%.
Rarely have investors and business decision makers seen such exchange rate uncertainty, with a 20-30% range for where the pound could be in 2 to 3 years' time, dependant on closed-door discussions between politicians.
In our view, UK investors with a low appetite for risk should ensure the bulk of their investments are sterling denominated. Doing this should help to remove one particular source of uncertainty from the equation.

It's not often you can say that interest rates doubled today. Rate hikes are never popular with borrowers, but with base rates at only 0.5% and inflation at 3% there will be little pushback. We expect the Bank of England to wait and see before making further changes. As the Bank made clear in their statement, Brexit is still the elephant in the room and there are considerable risks to the economic outlook and to sterling, which sold off in the aftermath of the announcement. 

Nearly eighteen months on from the referendum, all options remain plausible. It's hard to imagine a continued tightening of monetary policy in a disruptive no deal outcome, and in this scenario sterling could easily fall another 10 to 15%. On the other hand, if permanent single market membership becomes likely, or if we see a reversal of the decision to leave the EU, the Bank of England would be comfortable raising rates further. In this case, sterling would probably rise 10 to 15%.

Rarely have investors and business decision makers seen such exchange rate uncertainty, with a 20-30% range for where the pound could be in 2 to 3 years' time, dependant on closed-door discussions between politicians.

In our view, UK investors with a low appetite for risk should ensure the bulk of their investments are sterling denominated. Doing this should help to remove one particular source of uncertainty from the equation.

Past performance is not a guide to future performance. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.