UK political turmoil last hurdle to summer rate hike

By David Goodman and Elizabeth Burden

Political turmoil fanned by Brexit may be the last hurdle for a Bank of England interest-rate rise next month.

With the UK economy bouncing back and consumers willing to spend again amid good weather and World Cup fever, politics is the big unknown three weeks before governor Mark Carney and fellow officials announce their next policy decision. For now, investors are betting on a quarter-point hike.

UK Prime Minister Theresa May appears to have survived the loss of two high profile ministers this week, but anger within the Conservative Party over Brexit is keeping alive the prospect of a leadership challenge or general election. Two more Tories quit their party roles earlier this week, while some eurosceptics are said to be considering a radical last-ditch move that could bring down her minority government later this year.

While the central bank has always said Brexit may restrain the UK economy, it has thus far seemed prepared to push ahead with tightening as the UK thrashes out a deal with the EU. But an election, or the growing risk of leaving the EU without new trading arrangements in place, would add additional uncertainty. “If the current political chaos affects negotiations, I’d expect the BoE (Bank of England) to be pretty worried,” said Victoria Clarke, an economist at Investec in London. “If the BoE faces the prospect of no deal, they will be really nervous about doing anything to tighten policy,” she said.

Foreign Secretary Boris Johnson quit this week just hours after the resignation of the Brexit Secretary David Davis. The chances of an August rate hike moved to 70% from around 80% previously but rebounded after the latest UK growth figures.

“Increased political uncertainty may impact on growth particularly if the resignations trigger a leadership election, but you’ve got to think of other issues,” said George Buckley, chief economist at Nomura International.

“Why did Davis and Johnson resign in the first place? Because May adopted a softer Brexit stance, which means, if anything, stronger growth. So the bank should feel more confident,” he said.

- Bloomberg

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