BoE won’t hike if Brexit occurs – Nomura

Research Team at Nomura, notes that Michael Saunders’ appointment to the MPC has renewed concerns that the MPC might hike in response to an inflationary devaluation in a Brexit scenario.

Key Quotes

“We still view such a response as fundamentally wrong.

The depressing effect on demand creates disinflationary spare capacity over the policy relevant horizon and the need to cut. Hikes will only occur if the UK economy was impervious to Brexit, became an emerging market in need of hot money inflows, or if the BoE believed inflation expectations were de-anchored.

If poor market functioning facilitated a GBP collapse far beyond the 10-15% we expect, a BoE intervention is not out of the question. However, the UK’s small FX reserves and the conflicting need to loosen policy would mean the efficacy of any GBP intervention would be questioned by the markets.

We still expect significant curve steepening in a Brexit scenario.”