Photographer: Chris Ratcliffe/Bloomberg

`Brexit' Risk and Investors' View of U.K. Interest Rates

Market pricing could shift dramatically in the event of stay vote

``Brexit'' — it's clouding the outlook for everything, especially U.K. interest rates. 

As jitters about the prospect of a vote for the U.K. to leave the European Union intensify, an increase in benchmark borrowing costs isn't fully priced in by investors until 2019. That's prompted economists at Bloomberg Intelligence to try and quantify the distortive effects of the referendum and what it means for Bank of England policy.

Economists Dan Hanson and Jamie Murray adjusted the curve using bookmaker odds of a 33 percent chance of an EU exit. Removing that risk shows a rate increase in the first quarter of 2018, seven quarters earlier than the market currently anticipates.

But that's still a year later than economists in a Bloomberg survey predict. Hanson says the remaining gap may reflect concerns about global growth. And those could dissipate quickly: 

``Should the data provide signs of ongoing resilience, expect that gap to narrow further into the autumn aided by a more proactive tone from Governor Mark Carney and his colleagues.''

So while all this doesn't change the prognosis for this month's Monetary Policy Committee meeting — where officials will probably keep the key rate at a record low 0.5 percent — the U.K. voting ``no'' to Brexit on June 23 could mean a rate increase is in the offing as soon as this year. 

George Buckley, an economist at Deutsche Bank, pursues a similar theme:

``We continue to think that the Bank of England will raise interest rates before the market expects. In the event that the U.K. votes to remain in the EU on 23 June, the markets may well need to re-price an earlier rate rise than currently expected.''

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