The Bank of England will be forced to cut interest rates this year because of rising risks to Britain from Brexit and global trade tensions, Royal Bank of Canada predicted, the first major bank to make such a call.
RBC, a primary dealer of British government bonds, said in a research note to clients that the BOE will soon have to ditch its main message that rates will need to rise at some point – even if Brexit goes smoothly.
Financial markets are increasingly reflecting the possibility that Brexit does not go smoothly, sending the pound to a two-year low against the U.S. dollar.
Last week, BOE Governor Mark Carney warned of growing risks no only from a no-deal Brexit but also an escalation of the global trade tensions that have led other central banks to signal that they are ready to provide more economic stimulus.
Boris Johnson and Jeremy Hunt – the candidates to replace Theresa May as prime minister – have said they are prepared to leave the European Union without a deal if necessary. Most lawmakers have said they would try to block this outcome.
RBC, which previously expected a rate hike in February, said there was a 60-per-cent chance on a general election and another delay to Brexit. That would force the BOE to cut Bank Rate – which stands at 0.75 per cent – by 25 basis points in November.
RBC saw a 25-per-cent chance that Britain departs the EU on Oct. 31 with no deal, which it thinks would compel the BOE to cut Bank Rate by 50 basis points and restart its quantitative easing stimulus program.
There is only a 15-per-cent probability that Britain leaves the EU with a deal on Oct. 31, RBC said. But even this would not mean the BOE resumes its plan for limited and gradual rate hikes.
“We don’t necessarily share the view that the U.K. economy will see a substantial pickup in growth even in a smooth Brexit,” RBC economists Peter Schaffrik and Cathal Kennedy said.
A Reuters poll of economists conducted last month showed only one forecaster, commentary service IFR Markets, predicted a rate cut in late 2019.
Only three forecasters of more than 50 expected a rate cut in 2020, including another primary dealer, NatWest Markets.