The latest labour market data suggests that the Monetary Policy Committee could quickly turn hawkish if a no deal Brexit is avoided. In its November Inflation Report, the Bank of England forecast inflation to exceed its target throughout the next two years even if it raises interest rates by 50bps over the same period. And the latest pay growth figures suggest that inflationary pressures are building more quickly than it anticipated. Headline annual pay growth hit 3.3% in October, well above the 2¾% expected by the Bank. But concerns that there will be a no deal Brexit mean that investors currently expect just one interest rate hike over the next two years. We suspect that if a no deal Brexit is avoided, investors would almost certainly revise up their interest rate expectations closer to our forecast that Bank Rate will rise to 2% by the end of 2020. This would probably cause the pound to reverse much of its depreciation since 2015, rising to $1.45, but cause a sharp sell-off in gilts.
Become a client to read more
This is premium content that requires an active Capital Economics subscription to view.
Already have an account?
You may already have access to this premium content as part of a paid subscription.
Sign in to read the content in full or get details of how you can access it
Register for free
Sign up for a free account to gain:
- Unlock additional content
- Register for Capital Economics events
- Receive email updates and economist-curated newsletters
- Request a free trial of our services