Major bank warns of ‘very serious’ impact if UK votes to ‘Brexit’

 

The UK’s economic growth will be hurt if the country votes to exit the EU in a referendum, and growth could even suffer in the run up to a vote, Bank of America Merrill Lynch is warning.

As the bank notes, British Prime Minister David Cameron’s attempts to negotiate changes to the UK’s relationship with the EU aren’t going smoothly. Efforts to negotiate a deal to make migrants wait for four years before they’re eligible for in-work benefits such as tax credits are being met with fierce resistance. Compromise is in the offing.

That could make it much tougher for the stay-in campaign ahead of an in-out referendum on the UK’s EU membership that’s scheduled to run before the end of 2017, but which could come as early as 2016.

There’s obviously a long way to go before the referendum, but the polls have recently been narrowing. There are a large number of ‘don’t knows’ at the moment, but the split between those who want to leave and those who want to stay at this stage is very close. A lot depends on how Cameron’s re-negotiations go, with the polls indicating many more in favour of staying if there are “major changes” to the UK’s relationship with the EU.

Major changes include greater UK control over immigration and borders, with welfare benefit restrictions coming a close second.

That’s making the City nervous.

“Uncertainty about the referendum outcome could hurt UK growth next year even ahead of the actual vote. We have assumed a 20 basis point drag but have no way of reliably quantifying the potential effect,” write BAML UK Economist Robert Wood and FX Strategist Kamal Sharma.

They think the uncertainty could also influence the Bank of England, which is expected to start raising interest rates at some point next year. While many consumers will be hoping rates stay low, the Bank of England starting to ‘normalise’ rates would actually be a sign that policymakers feel the UK economy no longer needs the crisis economic measures put in place back in 2008-09.

“The (Bank of England) will need to take account of any actual or potential drag, while the timing of the referendum could affect the BoE’s decisions: it is hard to imagine policy makers hiking rates a few weeks before a Brexit referendum, for instance,” the BAML strategists add.

The bank has been surveying investors, and almost a third are already looking at options to hedge against the risks of a UK exit, known as a ‘Brexit’.

‘Brexit’ is on most investors’ radars, with nearly a third looking to actively hedge against the risk

Source: Bank of America Merrill Lynch

The lack of a clear date for the referendum means a Brexit is well down the list of major concerns among investors for 2016. That list is topped by worries about a potential fast economic slowdown in China, followed by concerns about a slowdown in the US.

So how should investors take account of all this uncertainty and risk.

BAML is sticking with a recommendation that foreign exchange investors should own one-year GBP/USD volatility, even though the volatility has increased since the end of November.

“There is no guarantee that the EU Referendum will be held by the end of next year, but a premium is starting to be priced in,” the BAML analysts write. “Nonetheless, we reiterate that in the absence of a firm date for the EU Referendum, the FX market still lacks a firm anchor for its Brexit trading view. Whilst cognizant of the risks of a mid- to late-2016 referendum investors seem, for now, content to buy some longer dated protection on the chance that it is held then.”

This article originally appeared here: http://news.markets/forex/major-bank-warns-of-very-serious-impact-if-the-uk-votes-to-exit-eu-6693/