|CRIMSON TAZVINZWA, AIWA! NO!|Jacob Rees-Mogg has launched a personal attack on the Bank of England Governor Mark Carney, saying he should not have been in the post for some time.
Bank of England governor Mark Carney has warned ministers that a “no-deal” Brexit could see house prices crash by a third, Sky sources say.
Briefing Theresa May and her top team in Downing Street, Mark Carney laid out three different scenarios the Bank believes could come to pass if Britain leaves the EU without a withdrawal agreement.
The worst case scenario would see Britain go into recession, a slump in the value of the pound and a crash in house prices.
He told BBC News that Mr Carney was a “second-tier Canadian politician” who “failed” to get a job at home
According to the Office for National Statistics (ONS), the Consumer Price Index (CPI) rose to its highest level since February, driven by increasing prices for transport services, clothing and recreational and cultural goods.
However, these rises were partially offset by a fall in prices for furniture and household goods and telecommunications.
Mike Hardie, head of inflation at the ONS, said: “Consumers paid more for theatre shows, sea fares and new season autumn clothing last month.
“However, mobile phone charges, and furniture and household goods had a downward effect on inflation.”
On the news, sterling spiked to an eight-week high against the US dollar, up 0.45% to $1.3206, while the pound rose 0.32% against the euro to €1.1275, as pressure could now be placed on the Bank of England to raise interest rates faster than expected.
The BoE’s Monetary Policy Committee unanimously voted to increase rates by 25 basis points to 0.75% in August, in response to inflation remaining above target for the forecast period.
Markets are currently pricing in a 55% chance of a rate hike in May 2019 and just a 33% chance in both February and March.
Ben Brettell, senior economist at Hargreaves Lansdown, commented: “The numbers reinforce expectations that policymakers will gently lift interest rates over the next couple of years.
“The figures will not come as welcome news to the Bank of England though – they will be desperate to leave policy unchanged until we get some clarity over Brexit, and will not want to be forced into a rate rise by accelerating prices.
“A rise to 1% is tentatively priced in for around May next year, though clearly a disorderly Brexit would force a dramatic rethink.”
Dean Turner, economist at UBS Wealth Management, said: “Brexit concerns aside, today’s data will provide further ammunition to the hawks on the MPC.
“This backdrop of a moderately hawkish MPC reinforces our view that any positive news on Brexit is likely to be met with the pound unwinding some of its recent weakness.”
A 10% fall in the pound, a surging FTSE 100, and a drastic move from the Bank of England: here’s how markets will react to a no-deal Brexit
- A no-deal Brexit is rising in likelihood as the UK’s March 2019 deadline approaches.
- No deal would be hugely disruptive for financial markets.
- It would likely send the British pound plummeting, UK stocks surging, and force the Bank of England into drastic action.
Earlier this week, the government released a series of papers detailing what might happen in the event of no deal. They varied from shortages of medicines, to rising credit-card fees, to a shortage of sperm. What the government didn’t discuss is what might happen in financial markets if such a situation were to play out.
Thankfully, research house Pantheon Macroeconomics has modeled what no deal might mean for key British market assets in the aftermath of it happening next March. Although it would not be as seismic a shock as the initial vote to leave the European Union in June 2016, markets would see large moves across currencies, equities, and bonds.
More pain for the pound
First up, the British pound would inevitably suffer. Since the referendum, the pound’s movements have been almost entirely linked to Brexit developments. Any news that suggests Britain is heading for a softer Brexit, and it rises; any news to the contrary, and it falls.
That relationship is reflected in the pound’s recent slump to less than 1.28 against the dollar, which has coincided with the rising probability of no deal. If no deal does materialise, Samuel Tombs, Pantheon’s chief UK economist, says the pound would drop more than 10% from current levels in the immediate aftermath, falling to a low of $1.15 by the end of March.
- SEE ALSO: There’s a counterintuitive argument that preparations for a nightmare Brexit will actually be good for the UK economy
Other analysts are inclined to agree with Tombs’ prognosis. Back in July, Neil Jones, Mizuho Bank’s head of hedge fund sales, told Bloomberg that in the event of a no deal Brexit, the pound would drop sharply and “hit new post-referendum lows.”
Commerzbank strategist Thu Lan Nguyen mirrored that viewing, saying she would “anticipate at least a reaction to the extent we saw after the referendum.” On the day after the referendum, the pound dropped more than 8%.
A rampant stock market
While the pound would plummet, the FTSE 100 — which enjoys an inverse relationship with the currency — would likely surge to record highs.
A weak pound tends to mean a strong UK stock market. That is because it is heavily skewed towards companies that don’t actually make their money in the UK. The FTSE 100, for example, contains miners, oil firms, and pharmaceutical giants, with around two-thirds of all revenues for companies in the index derived from abroad. This has helped the index hit record high after record high following the vote.
Pantheon’s forecast is that the FTSE 100 breaks above 8,000 in the event of a no-deal Brexit, a rise of around 5.5% from Friday’s closing price.
Bond yields fall
Turning to the UK’s bond market, Pantheon forecasts the yield on the 2-year gilt would fall to 0%. It may seem counterintuitive that yields would fall, given that lower yields tend to reflect investors perceiving a bond as being safer — something unlikely in the event of a no-deal Brexit.
Pantheon’s argument, however, is that a no-deal Brexit would force the Bank of England to immediately reverse the normalisation of monetary policy it has embarked on in over last year.
The bank has raised interest rates twice since November 2017, hitting 0.75%, but would need to cut rates to 0%, as well as launch £100 billion ($129 billion) of new quantitative easing, which in turn would suppress gilt yields, according to Tombs. That cut would be the first time the UK’s bank rate had dropped to 0%.
If these scenarios seem extreme, Tombs and his colleagues have some reassuring news, they put the prospect of a no-deal outcome at just 10%, citing their belief that Prime Minister Theresa May will capitulate to the EU’s demands, eventually leading to the softest possible Brexit.
The Dutch prime minister has urged Theresa May to “urgently” clarify “every aspect” of the UK’s future relationship with the EU.
Mark Rutte made the comment following a working lunch with the British prime minister on Tuesday in The Hague.
He said: “We urgently need clarity about every aspect of the future relationship between the EU and the UK.”
The Dutch prime minister has previously used Brexit to highlight how “EU membership is a conscious choice” and is keen to continue good relations with the UK.
An ally of Mrs May’s amongst the EU27, he has however not been afraid to criticise the lack of progress over Brexit, especially when it comes to trade.
Pressure is piling on Mrs May to get on with Brexit, with Chancellor Philip Hammond acknowledging that there is an “urgent” need for the government to agree its Brexit position.
Ahead of crunch talks with the cabinet at the prime minister’s country retreat, Chequers, on Friday, he said ministers recognise the critical need to set out more details of the trading and customs relationship they want with the EU post-Brexit.
“On Friday the cabinet will meet to set out our way forward in our negotiations with the European Union,” he told parliament on Tuesday as the prime minister had lunch with her Dutch counterpart.
“We recognise that this is now urgent and that we need to make progress.”
He added that the government needed to agree on a Brexit which “delivers the needs of business”.
Firms, including Airbus and BMW, last week expressed frustration over the lack of progress but were criticised for speaking out by ministers including Jeremy Hunt and Liam Fox.
The British Chambers of Commerce (BCC) earlier on Tuesday warned businesses are running out of patience over the lack of clarity, more than two years after the vote to leave the EU.
It urged politicians to cast aside “squabbling” and work in the national economic interest to remove uncertainty over tax, tariffs, customs and regulation.
The Commons treasury select committee also pushed ministers on Tuesday, calling for the treasury and the Bank of England to draw up analysis of the impact of any Brexit deal.
It also requested research from the Financial Conduct Authority on the potential impact of the withdrawal agreement and future framework.
Treasury committee chairwoman Nicky Morgan said MPs should be “properly informed” before the promised parliamentary vote on the deal.
Theresa May has promised more details in a White Paper to be published after Friday’s get-together at her official country residence.
A “third” customs plan will be presented to the cabinet on Friday to offer “the best of both worlds” – an independent trade policy and friction-free trade.