United Kingdom ETFs may continue to weaken as the Bank of England warned that Brexit uncertainty “intensified considerably” over the last month.
Year-to-date, the iShares MSCI United Kingdom ETF (NYSEArca: EWU) declined 15.2% while the currency-focused Invesco Currency Shares British Pound Sterling (NYSEArca: FXB) dropped 6.7%.
U.K.-related markets have been weakening as turmoil surrounding Britain’s divorce from the European Union intensified. With under 100 days to go before the final breakup, Prime Minister Theresa May has yet to gain support of her Conservative Party for the deal she struck last month with Brussels, Reuters reports.
In response, the Bank of England cut their forecast for British quarterly economic growth in the last three months of 2018 to 0.2% from 0.3% and warned that conditions won’t likely change in early 2019.
“Brexit uncertainties have intensified considerably since the committee’s last meeting,” the Monetary Policy Committee said in a summary of its December meeting. “These uncertainties are weighing on UK financial markets.”
Furthermore, the central bank warned that the global slowdown was pulling down Britain’s economy and the negative effects started sooner than expected.
Brexit Fallout
In response to the weakness, the BOE decided to hold rates at 0.75% as expected. Central bank officials have stated that interest rates could move in either direction after Brexit based on the country’s ability to avoid any fallout from the Brexit.
“The general message remains largely the same: they would prefer to be tightening sooner rather than later, but Brexit is going to stop them doing that for quite some time,” James Smith, an economist with ING bank, told Reuters.
A piece of good news was that inflation could remain below target, with headline rate consumer price inflation at around 1.75% in January, due to the drop in crude oil prices.
Furthermore, the BOE said tax and spending measures announced back in October could also modestly bolster the economy by around 0.3 percentage points over the next few years.
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