Investments 

No deal Brexit could see interest rates cut

No deal Brexit could see interest rates cut

The rejection by Parliament of the government’s Brexit deal could see interest rates cut, according to Richard Buxton, who runs the £1.7bn Merian Global Investors UK Alpha fund.

Last night (January 15) the Prime Minister faced a landslide defeat as her Brexit deal with the EU was rejected by MPs with 432 votes to 202.

Mr Buxton said: "If a deal can ultimately be agreed, I believe we may see the Bank of England hike policy interest rates up to three times over the course of 2019.

"Conversely, if the UK does leave the EU without an agreement, I would expect the Bank’s Monetary Policy Committee to move rapidly to cut interest rates from their already-low levels. The resumption of monetary stimulus, in the form of quantitative easing would, in my view, be a possibility."

Central banks typically cut interest rates when they expect economic growth to slow.

David Zahn, head of European Fixed Income at Franklin Templeton, said markets crave certainty above all else, and so may welcome a no deal Brexit outcome as preferable to further delays.

He said: "The impact of such an outcome would be significant, but we don’t think a Hard Brexit would necessarily be the end of the world. In many ways, it could offer the quickest route to the certainty that markets crave.

"A no-deal Brexit would likely mean heightened levels of uncertainty for three to six months as things get worked out. In many areas, the EU has said it will extend the status quo ante for the next year while the two sides adjust to the new environment.

"The initial response would likely be negative: we’d expect bond markets to rally significantly; gilts would probably revisit their historic lows. But our perception is that if a Hard Brexit were confirmed, things could only get better."

Saker Nusseibeh, chief executive at Hermes Investment Management, said: "We are watching closely to understand the secondary effects on stocks and currencies, inclusive of sterling, and the specific industries that are tied to frictionless trade.

"Most people would prefer to see an end to uncertainty. However, the sad truth is that continued uncertainty has prevailed, and there appears to be no clear plan B."

Sterling rose by 0.05 per cent to $1.287 in the aftermath of the vote, after declining by more than 1 per cent earlier in the day.

The FTSE 100 has been 0.17 per cent lower since it opened this morning (16 January) but the shares of some companies exposed to the UK domestic economy, such as the retailer Next and Lloyds Banking Group, were up more than one per cent on yesterday’s closing price.

david.thorpe@ft.com