03 February 2020
On Friday night, the UK formally exited the EU; it has entered the transition phase. Although officially out of the EU, the country will continue to enjoy the benefits of the single market until the end of 2020. This is far from the end of the Brexit saga, however, as there is a huge amount of work to complete, most notably:
- Negotiations on how the UK’s relationship with the EU should look. This will be heavily focused on trade but will also include arrangements for security and the thorny issue of access to the UK’s coastal waters.
- The UK needs to implement the Withdrawal Agreement, including measures to prevent a hard border in Northern Ireland.
- Pass legislation to establish government functions that were previously in the domain of the European Commission and to prepare for life on the outside of the EU.
Key dates for 2020 are shown in the diagram below. Of particular note will be the late-June summit to assess progress, with the end of June marking the last date that a transition extension can be agreed. Following that, 26 November 2020 will be a crucial time for a trade agreement to be finalised. This process will be complicated by the fact that member states and the European Parliament will need to approve any deal.
Prime Minister Johnson’s insistence that transition arrangements must only last until the end of 2020 means that time to agree a UK-EU trade deal will be short. While the starting point for goods and services is the same, the UK government’s stance on not being a rule-taker from Brussels means that negotiations will not be straightforward. Indeed, the Institute for Government, a think tank, believes that there will only be time to agree a goods-only free trade agreement. The short timescale will make it difficult for UK businesses to prepare for operating outside the single market.
While the Bank of England did not pre-emptively ease policy at its January meeting, Governor Carney did highlight that the UK was about to undergo a “profound structural change.” The data was termed “good enough” to keep the MPC on hold but it will remain alert to signs that the post-election bounce in business and consumer sentiment is fading.
Against this backdrop, allocations to gilts still look relatively attractive, especially in the shorter end of the curve. Gilts have cheapened somewhat post the MPC announcement. Moreover, given the Brexit process is far from over and, with the uncertainty over trade arrangements likely to remain high for most of 2020, it is hard to see the rebound in activity proving durable. This suggests an interest rate cut is likely to remain a live possibility over the coming months.