Edging towards an interest rate cut

Chancellor Sajid Javid’s new fiscal rules clear the way for a big splurge in investment spending. And the fiscal loosening would probably be even larger if the Labour Party were to win the election. The flipside of this big fiscal loosening is that monetary policy may need to be tighter than might otherwise have been the case. But the Bank of England this week sounded far less convinced that interest rates would be raised, even if there were a “clean” Brexit deal. We have pencilled in a rate cut in May 2020 in our repeated delays Brexit scenario, but the risk is that it could now come sooner. Further ahead, though, a “clean” Brexit deal and a fiscal boost could mean that rates ultimately rise further than the markets expect.