One-third probability of Brexit is too big to ignore - HSBC

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Mar 9, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
    Likes Received:
    Research Team at HSBC, suggests that the latest bookmaker odds still suggest around a one-third probability of a vote to leave, while opinion polls suggest a tighter race.

    Key Quotes

    “Our base case is that UK remains in the EU. But a one-third probability of Brexit is clearly significant.

    We think the immediate aftermath of a Brexit vote would be a period of high political and economic uncertainty. Crucially, it is unclear what the post-EU arrangements would be. The economic implications of a ‘soft exit’ (where the UK remained in the European Economic Area or maintained strong ties with the EU) could be very different to a ‘hard exit’ (where the UK withdrew fully from the single market).

    Clarity could take time to emerge, particularly if the UK Prime Minister (and perhaps also the Chancellor) resigned. This is possible because voters would have rejected the ‘new settlement’ they negotiated and commended to the people.

    Our central case in the event of a vote for Brexit is that uncertainty grips the economy. This could take around 1.0-1.5pp off the GDP growth rate by H2 2017. This would push our 2017 growth forecast, currently 2.3%, into the 0.8-1.3% range. And if sterling were to fall by around 15-20% (as our currency strategists predict), UK inflation could rise by up to 5pp (our end-2017 inflation forecast is 1.8%). In the event of a vote for Brexit, concerns about deflation could swiftly give way to worries of stagflation.

    The Bank of England (BoE) would face a dilemma. A large sterling depreciation could send inflation soaring but tightening policy would amplify any slowdown in growth. We think that the BoE would ‘look through’ higher inflation caused by a weaker pound, meaning policy rates would be on hold for longer. Indeed, it could even cut rates to shore up confidence.

    Under a more benign scenario, markets and firms might assume a good ‘divorce’ settlement could be achieved. In turn, fears of paralysing uncertainty could prove to be misplaced. But there is also a worse scenario, which would see the BoE forced to tighten policy despite a slowdown in growth. If Brexit uncertainty prompted foreign investors to re-think their allocations to UK assets, the BoE might need to raise interest rates to stabilise the currency and attract foreign capital inflows.

    Once the immediate period of uncertainty subsides, the economic implications would depend on the labour market and the UK's ability to strike trade deals quickly. Regardless of the outcome, the UK should remain a flexible and dynamic economy. We think it would eventually achieve a strong economic performance in or out of the EU. The unknown is how economically destructive and drawn out the transition phase would be.”
    For more information, read our latest forex news.

Share This Page

free forex signals