What will the policymakers do?

Following the vote for a Brexit, a considerable amount of uncertainty hangs over the UK, which is likely to weigh on activity in the short term. However, we think that the near-term hit to the economy will be somewhat weaker than some of the more pessimistic forecasts, such as HMT’s.

After all, there is scope for policymakers to respond to any weakness in the economy. We think that a cut in interest rates in the near term looks likely, and possibly even a re-starting of the Bank of England’s quantitative easing programme. Meanwhile, for all the talk of a post-referendum emergency “austerity budget”, we think the Chancellor (whoever that might be!) would be more likely to let his fiscal rules slide. In any case, the fiscal mandate has a get-out clause if growth weakens materially.