Bank of England unlikely to cut rate until May 2017

The formal notification of the intention for the U.K. to exit, the Article 50, is expected to be set off before the end of March 2017, according to Societe Generale. At present, a legal challenge has been unveiled, arguing that an act of parliament is required to be passed before the article can be invoked, noted Societe Generale. It would possibly fail when the probable appeal is heard in December 2016. While the U.K. central bank has stepped in to steady demand, it is unlikely that the BoE would be able to avert a severe deceleration of the economic growth.

It is quite unlikely that the BoE MPC would be ready to deliver its signalled final rate cut during its meeting in November 2016, given the strength of activity post the Brexit vote and the renewed fragility of pound. It is possible that the MPC would wait for certain proof of stability in the sterling and some convincing data indicating that the U.K economy is being adversely impacted by the prospect of Brexit. Therefore, the central bank is unlikely to cut rate to 5bp until May 2017, added Societe Generale.

The economic activity in the U.K. would be hurt by two key influences: the Brexit uncertainty shock and the descent of the U.S. economy into recession in the end of 2018. This might lead to U.K economic growth declining to a low of 0.5 percent in 2019, stated Societe Generale. The government, before that, is expected to loosen fiscal policy in an attempt to steady growth.

“The twin effects of a base effect from commodity prices and the recent Brexit-driven fall in the pound should push up inflation to a peak of 3 percent in early 2018 before it then falls back below target as the output gap opens up sharply”, said Societe Generale.