skip navigation

Stay up to date on timely topics and market events. Subscribe to our Blog now.

June 11, 2020

Britain, The Bank and Brexit—Implications for UK Markets

By Gordon S. Brown

Stay up to date on timely topics and market events. Subscribe to our Blog now.

June was already shaping up to be an interesting month for UK markets given the latest round of trade talks between the UK and EU, and the upcoming July 1 deadline to agree on an extension to the “transition period”. But with evidence emerging around the scale of the recession, and the resulting policy responses by the government and the Bank of England (BoE), there are additional factors that investors need to consider when assessing the implications for UK markets.


Growth contracted by 2% in Q1 compared to expectations of -2.6% and initial estimates from the BoE’s May inflation report of -3%. The BoE forecast UK GDP to contract by a further 25% in Q2 and to be -14% for 2020 as a whole—considerably more pessimistic than private-sector economists’ consensus forecast of around -8%. The BoE’s baseline is for growth to pick up “relatively rapidly” in H2 but for end-2019 activity levels not to be reached until late 2021. Inflation is expected to fall below 1%, reflecting both the slump in demand and recent developments in the price of oil, while unemployment is forecast to rise to around 8%. In response, the UK government has announced a significant increase in fiscal spending and related measures, including immediate spending of approximately 5% of GDP, deferrals equivalent to around 2% and other liquidity/guarantees equivalent to around 15%. Consequently, government borrowing is expected to increase to as much as 15% of GDP over the fiscal year 2020-21. Given the concurrent recession and large increase in fiscal spending, debt issuance for 2020-21 is estimated to increase to £250-300 billion, with the level of government debt/GDP expected to hit 100%. Further fiscal measures are expected to be announced in a July budget.

The Bank

In order to support economic activity and meet its inflation objective, the BoE’s Monetary Policy Committee (MPC) cut interest rates to 0.1% in May and voted by a majority of 7-2 to continue with its £200 billion gilt and corporate bond purchase programme, taking the stock of these purchases to £645 billion. The topic of negative interest rates has been discussed by the MPC and is priced into markets by early 2021. While the MPC has been careful not to rule this out, the dissent of two MPC members in favour of increasing asset purchases suggests this policy tool is more likely to be used in the first instance, possibly as soon as this month.


As the clock ticks down towards the July 1 deadline the UK government’s stated position is that it will not request an extension. But this focus has instead shifted to the latest round of negotiations around the future trading relationship. To date limited progress appears to have been made with the previous rounds of talks ending in mutual recriminations. While there are many outstanding issues, major sticking points remain over fishing rights and “level playing field” provisions. Our base case remains that both sides will reach an accord on some form of free trade agreement with zero/low tariffs.

Market Implications

Despite concerns about the surge in government bond issuance, in common with other large advanced economies, we expect BoE asset purchases and ongoing investor demand to largely offset this increase. With the prospect of a bare-bones trade deal at the end of the year coinciding with an already challenged growth picture and below-target inflation, it seems likely that the BoE will keep rates at a very low level for the foreseeable future and announce further increases to asset purchases. Consequently, we believe that UK gilt yields and corporate bonds will remain well supported. Conversely, we think this backdrop is less supportive for the British pound given the potential prospect of lower inward investment and portfolio flows.

© Western Asset Management Company, LLC 2022. This publication is the property of Western Asset and is intended for the sole use of its clients, consultants, and other intended recipients. It should not be forwarded to any other person. Contents herein should be treated as confidential and proprietary information. This material may not be reproduced or used in any form or medium without express written permission.
Past results are not indicative of future investment results. This publication is for informational purposes only and reflects the current opinions of Western Asset. Information contained herein is believed to be accurate, but cannot be guaranteed. Opinions represented are not intended as an offer or solicitation with respect to the purchase or sale of any security and are subject to change without notice. Statements in this material should not be considered investment advice. Employees and/or clients of Western Asset may have a position in the securities mentioned. This publication has been prepared without taking into account your objectives, financial situation or needs. Before acting on this information, you should consider its appropriateness having regard to your objectives, financial situation or needs. It is your responsibility to be aware of and observe the applicable laws and regulations of your country of residence.
Western Asset Management Company Distribuidora de Títulos e Valores Mobiliários Limitada is authorized and regulated by Comissão de Valores Mobiliários and Brazilian Central Bank. Western Asset Management Company Pty Ltd ABN 41 117 767 923 is the holder of the Australian Financial Services Licence 303160. Western Asset Management Company Pte. Ltd. Co. Reg. No. 200007692R is a holder of a Capital Markets Services Licence for fund management and regulated by the Monetary Authority of Singapore. Western Asset Management Company Ltd is a registered Financial Instruments Business Operator and regulated by the Financial Services Agency of Japan. Western Asset Management Company Limited is authorised and regulated by the Financial Conduct Authority (“FCA”) (FRN 145930). This communication is intended for distribution to Professional Clients only if deemed to be a financial promotion in the UK as defined by the FCA. This communication may also be intended for certain EEA countries where Western Asset has been granted permission to do so. For the current list of the approved EEA countries please contact Western Asset at +44 (0)20 7422 3000.