How will the MPC respond to the EU referendum?

The MPC’s attempt to base its forecasts on the UK remaining in the EU suggests that it believes trade-weighted sterling will rise by around 5% on a vote to stay. But it also implies that it doesn’t think that interest rate expectations will be affected. However, we think that interest rate expectations will rise on a vote to remain and that the MPC will begin tightening monetary policy in November.

Meanwhile, if the UK votes to leave the EU, we agree with the MPC that sterling will probably fall sharply. But we don’t think that a Brexit would result in a cut in interest rates. Instead, it would just add to the argument for rates to remain on hold for longer.