The Bank of England (BoE) could announce another round of quantitative easing (QE) should the Brexit negotiations weaken the UK economy.
Victoria Hasler, head of research at Square Mile Investment Consulting and Research, said with Brexit looming, it was “difficult to see the BoE hiking rates anytime soon”.
She predicted if the negotiations between UK government and the EU do not go well over the next two years following the triggering of Article 50, it could tip the UK economy back into recession.
Ms Hasler forecast if Prime Minister Theresa May pursued what she has called a ‘hard Brexit’, it was “more likely the BoE will go down the QE route” and not raise interest rates.
Ms May is due to trigger Article 50 this week, the formal mechanism for leaving the union, marking the start of the two-year period Britain will have to reach a deal.
The BoE began an 18-month corporate bond purchase scheme in September last year after the UK’s vote to leave the EU, in an effort to cushion the economy.
John McNeill, head of rates at Kames Capital, agreed the UK could see the return of QE.
He said once Article 50 has been triggered should there be an economic downturn or the UK economy is seen to weaken, the BoE will ease.
Mr McNeill suggested in the event of QE, government bond yields would stay suppressed and that additional QE would involve more corporate bond buying.
Ms Hasler explained “gilt yields would come back in on more QE” and said there could be a breakdown in correlation of gilts and US Treasuries if the BoE were to ease monetary policy while the US Federal Reserve continued to pursue rate increases.
Patrick Connolly, certified financial planner at Chase de Vere Independent Financial Advisers, said: “In this environment it will be difficult for the Bank of England to raise interest rates, even if we see inflation continuing to rise, as higher interest rates could have a negative impact on both business and consumers’ ability to spend.
“We have seen that the BoE will take decisive actions to support the UK economy and, at this stage, it would be sensible to keep all options on the table in terms of future actions.”
He advised investors to retain exposure to fixed interest in their portfolios although as an asset class it might not provide the same level of security as it has in the past.
“Some areas of fixed interest do look expensive, although this doesn’t necessarily mean that they’ll fall in value, especially if the outlook becomes more negative and investors become more cautious,” he added.
“In this environment we prefer to get exposure to fixed interest through flexible strategic bond funds.”
Mr McNeill advised investors not to abandon the asset class but exert more caution.
eleanor.duncan@ft.com
