July 17, 2018 / 2:50 PM / 2 months ago

BoE to play its hand in August; UK-EU to eventually cut a deal - Reuters poll

LONDON (Reuters) - The Bank of England will nudge up borrowing costs next month, according to economists polled by Reuters this week who have grown a bit more confident Britain will strike a free trade deal with the European Union.

FILE PHOTO: A pigeon stands in front of the Bank of England in London, Britain, April 9, 2018. REUTERS/Hannah McKay/File Photo

Britain is due to part ways with the EU in eight months, ending a 40-plus year marriage, and on Monday Prime Minister Theresa May narrowly won a series of votes in parliament, keeping her newly arranged strategy on how to leave just about on track.

May has vowed to stick to her plan to negotiate the closest possible trade ties with the EU. But she faces another battle - over trade - in parliament later on Tuesday, with pro-EU lawmakers hoping to influence her plans.

The latest Reuters poll, taken mostly ahead of Monday’s vote, gave a median 20 percent chance of a hard Brexit whereby no deal is reached by the end of March 2019. That was unchanged from a June poll.

Instead, the two sides agreeing on an EU-UK free trade agreement was seen as the most likely outcome, as it has been since polling first began on this in late 2016.

Second most likely was membership of the European Economic Area, under which Britain would pay to maintain full access to the EU Single Market. Those views appear to have solidified from last month, with more common contributors picking those two options.

In third place was leaving without a deal and trading under basic World Trade Organization rules. Bringing up the rear was Brexit being cancelled, but no respondent put that as their first or second most likely option.

The overall order was the same as in a June poll.

“Our base case remains that the EU and the UK will come to a last-minute agreement on a comprehensive Free Trade Agreement, which would commence when the transition period ends in December 2020,” said Stefan Koopman at Rabobank.

“Given how UK domestic politics evolve, however, it would be foolish to underestimate the risk of a hard Brexit without such an agreement.”

MODESTLY SOLID

While the recession predicted in the event of a leave vote in the 2016 referendum never happened, Britain’s economy slowed rapidly at the turn of 2018. Growth was predicted at 1.3 percent this year and 1.5 percent next, lagging its peers.

Still, there is only a median 20 percent chance of a recession in the coming year and a 30 percent likelihood of one in the next two years. But highlighting uncertainty, the highest two-year forecast was for 50 percent.

Marc Ostwald at ADM Investor Services said it was “very difficult to assign a probability when the Brexit negotiations outcome looks to be ever more binary.”

BoE Governor Mark Carney warned on Tuesday a no-deal Brexit would have “big” economic consequences and prompt the MPC to reassess the economic outlook and interest rates.

With solid but modest growth and inflation expected to average 2.5 percent this year and 2.1 percent next, close to the Bank of England’s 2 percent target, the central bank is not expected to tinker much with monetary policy.

On Aug. 2 policymakers will add 25 basis points to Bank Rate, taking it to 0.75 percent, 47 of 75 economists polled said. That will be followed by an identical increase soon after Brexit is due to be completed.

The next move won’t then come until 2020, when the Bank will add 50 basis points over the course of the year, putting Bank Rate at 1.5 percent, the poll found.

Markets are pricing in around an 80 percent chance of an August hike following more upbeat second-quarter data and hawkish comments from members of the Monetary Policy Committee.

“Following indications of a Q2 rebound and continued hawkish comments from the MPC we now join the market in forecasting a 25 basis point rate rise from the Bank of England,” Elizabeth Martins at HSBC told clients.

But that could all change. In a poll taken ahead of a May meeting, economists were convinced the Bank would hike that month, only for them to make the biggest turnaround in Reuters polls history a few weeks later to say policymakers would hold fire until August.

Polling by Anisha Sheth and Hari Kishan; Editing by Hugh Lawson

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