UK: Trading on transition – ING

James Smith, Research Analyst at ING points out that the UK parliamentary recess is well underway, but on the political front, it has been far from quiet.

Key Quotes

“With Prime Minister Theresa May’s position perceived to be weaker in the aftermath of June’s election result, infighting amongst senior ministers on both sides of the Brexit debate has become increasingly public.”

“Most of the latest rift centres round the potential transitional arrangement once the UK formally leaves the EU in 2019, in particular the immigration policy during this period. Chancellor Phillip Hammond has been vocally pushing for a ‘long’ period of transition, with free movement of labour only partially end in 2019. Liam Fox, who takes a relatively hard-line stance of Brexit, has publically disagreed with Hammond’s vision saying this would “not keep faith” with the referendum outcome.”

“But even if ministers aren’t agreed on the details, they do at least increasingly appear to be united on the need to avoid a “cliff edge” after Brexit in a post-Brexit transitional arrangement. Of course, there are still plenty of thorny issues to be resolved before the EU will agree to this. News reports following the latest round of negotiations suggest there are still “substantial differences” between UK & EU positions on citizen rights and the divorce bill. The EU has said previously that progress is needed on both before a transition period can be agreed upon.”

“However all of this is resolved, it is unlikely to happen before the fourth quarter of this year at the earliest. It’s not just about the timing of the announcement: for companies and markets, the length and framework of a transition period will be equally key. Until these details become clearer and as long as general uncertainty about the UK political climate prevails, investment is likely to remain subdued.”

“At its August meeting, the BoE said that investors are too cautious on interest rates. That’s despite a fairly noticeable steepening in the UK swaps curve following hawkish comments from Governor Carney and Chief Economist Haldane in June. We still think the Bank is unlikely to follow through on these signals and a rate hike this year looks unlikely. But if the MPC does opt to hike rates, we suspect this will be a “one (or two) and done” scenario rather than the start of a more substantial hiking cycle.”