James Knightley, Senior Economist at ING, suggests that the Bank of England will continue to sit on its hands until the UK’s referendum on EU membership is conducted. Key Quotes “Should the UK stay then interest rate hikes won’t be far away. If the UK leaves then it is rate cut cuts that will be on the agenda. As we approach the official start of the 10-week campaign period ahead of the 23 June referendum on the UK’s membership of the European Union we are starting to see signs that the uncertainty it is generating is weighing on activity. Interestingly, the Bank of England (BoE) commented on the referendum after last month’s policy decision, arguing that the uncertainty it has created “is likely to have been a significant driver of the decline in sterling. It may also delay some spending decisions and depress growth of aggregate demand in the near term.” Given this backdrop, it is clear that there is zero prospect of any policy change ahead of the referendum, particularly with little near-term inflation risk. Our house view remains that if the UK votes to stay in the EU we will see the delayed hiring and investment plans being implemented in 2H16. Given the underlying strength of the economy and rising medium-term inflation pressures we still think a November rate hike is possible. However, should the UK vote to leave the next move is likely to be a rate cut as policymakers try to shore up confidence. We expect sterling to fall sharply, which would push up inflation temporarily, but the expected hit to economic activity in an environment where business and consumer sentiment is severely strained suggests that the BoE will “look through” this. Instead, policymakers will focus more on the uncertain prospects for the economy now that its future is in the hands of politicians as the UK looks to secure trade deals that could take many years to negotiate.” For more information, read our latest forex news.