Whereas US yield curve inversions are close to a fool-proof predictor of US recessions, a recession in the UK has only followed inversions in the gilt yield curve on 50% of occasions. That’s not dissimilar from our best guess that there is a 40% chance of a no deal Brexit on 31st October, in which case a recession would probably follow. But investors appear to be underestimating the chances of interest rates rising if there isn’t a no deal. While the soft data has been disappointing, the hard data released this week support our view that if Brexit is delayed, cancelled or a deal is struck the MPC would hike interest rates.
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