BoE to cut rates to zero, no Fed hikes until 2017, says SocGen

Negotiations between the UK and the European Union will take time but Societe Generale’s working assumption is that a solution will be found were the UK largely retains access to the single market.

The French bank now sees the Federal Reserve becoming more cautious and has scaled back its expectations to no hikes this year and just two in 2017 versus a previous call for three.

Meanwhile, the Bank of England is expected to start easing but no change is seen to the planned European Central Bank programme of easing, with action by the other central banks easing pressure on the ECB to do so at a time when tools are already stretched. However, the dovish tone is likely to prevail for longer, SocGen said.

As far as the UK is concerned, it expects growth in 2016 to take a 0.2 percentage point hit, with a larger hit of 0.7pp in each of 2017 and 2018 as the uncertainty shock reverberates across the economy.

SocGen argued that business investment was likely to suffer as companies take fright at the prospect of reduced export and domestic demand, and sees investment falling by more than 2% in 2017.

“On the assumption that the government negotiates a deal that achieves an (imperfect) approximation to continuing access to the single market we would expect the damage to business sentiment to then gradually lessen.

“We expect the BoE to cut rates to zero and restart QE. The MPC will look through the inflation spike and focus instead on the growth implications. It will want to wait until there is some stability in the exchange rate and financial markets before easing so we see that starting in 2017.”

SocGen estimates the cost of Brexit for the euro bloc would be around 0.1pp of GDP a year by 2020 on the back of lower trade activity and business investment due to uncertainty.

“In the event of short term risks to financial stability, the ECB stands ready with liquidity as a first line of defence, coordinating closely with other central banks.

“In case more substantial risks arise, also to the medium term outlook for inflation, the key tools for further easing would be to expand the asset purchase programme and to cut the deposit rate further.”

However, SG noted the ECB is nearing the effective limits of its policies and there are considerable risks from the unconventional policy measures.

As for the US, it reckons the Fed will have to cut rates in 2019 as a recession in late 2018/19 is likely.