Markets still sanguine on rate outlook

The hawkish tone of the Bank of England’s “Super Thursday” announcements have helped to push up interest rate expectations a little and have fuelled a rise in sterling over the past week. But we doubt that investors have gone far enough in revising up their expectations. Admittedly, the twists and turns of the Brexit talks will continue to buffet UK markets. And with the Brexit negotiations still at an impasse, the chances of a near-term rate hike look extremely slim. But in our base case, which assumes that a Brexit deal is struck, we expect five 25bp hikes by the end of 2020, taking Bank Rate to 2.0%, compared with only two rises currently anticipated by markets. Note that our end-2020 interest rate forecast is 25bp higher than previously assumed, due to the fiscal stimulus announced in the Autumn Budget.