This morning it has been announced that Great Britain is set to leave the EU despite an exceptionally tight vote, but the question everyone is now asking is what next?
Of course, we can only speculate at the moment, but here is round up of how the results could affect the financial market.
The value of sterling is expected to take a significant hit in the medium term. It certainly fell sharply as it emerged that the UK was to leave the EU – at one stage down 10% to its lowest level since 1985.
That is likely to mean:
- buying goods or services from other countries will become more expensive
- inflation will therefore be higher
- goods being sold to other countries will become cheaper for the buyers
So what, in turn, will that mean for our household finances?
To combat the extra pressure on inflation, the Bank of England may consider raising interest rates. That would make mortgages and loans more expensive to repay. The Treasury forecast a rise of between 0.7% and 1.1% in borrowing costs (on top of what happens anyway), with the prime minister claiming the average cost of a mortgage could increase by up to £1,000 a year.
Since costs for landlords would increase, rents would also be likely to rise.
But equally, if there were a severe shock to the UK economy, the Bank of England might have to consider a cut in rates. In which case, the cost of lending could actually fall. It might leave rates as they are.
The International Monetary Fund (IMF) has warned that Brexit could cause a sharp drop in house prices. This was on the expectation that the cost of mortgages would rise.
The Treasury has said house prices could be hit by between 10% and 18% over the next two years, compared to where they otherwise would have been. This would be good news for first-time buyers, but not so great for existing homeowners.
The National Association of Estate Agents (NAEA) believes house prices in London could see the biggest change, losing up to £7,500 on average over the next three years, compared to where they otherwise would have been. Elsewhere, it said values could fall by £2,300. But since it expects prices to continue rising anyway, this means a slower rate of increase, rather than a fall in real values.
And again, if the Bank of England were forced to cut rates, all these projections would be wrong.
Several experts have predicted that the economic shock of leaving the EU would cause unemployment to rise in the UK. That would reduce the pressure for wage growth. The Treasury estimated that wages will be between 2.8% and 4% lower at the point of maximum impact, with a typical worker at least £780 a year worse off.
But let us not forget that the UK will remain a member of the EU for at least another two years, and predicting economic performance in two years’ time is – even in normal circumstances – notoriously difficult.
A week before the referendum, George Osborne warned that a vote to leave the EU might result in tax increases too. He spoke about a 2p rise on the basic tax rate – currently 20p in the pound – and a 3p rise in the higher rate – currently 40p. He also said Inheritance Tax (IHT) might rise by 5p, from its current 40p.
But to do so would go against the Conservative government’s promises at the last election, so would be difficult politically.
Many people believe the government would be much more likely to extend the period of austerity beyond 2020. The Institute for Fiscal Studies (IFS) has said that spending might need to be curbed for two further years.
During the referendum the Vote Leave campaign said it wanted to remove the 5% VAT charge on domestic fuel that is currently required by the EU. But it is not clear how – or when – that could be achieved.
During the referendum campaign, the prime minister said the so-called “triple lock” for state pensions would be threatened by a UK exit. This is the agreement by which pensions increase by at least the level of earnings, inflation or 2.5% every year – whichever is the highest.
Again, this assumes a poorer economy, and lower national income.
If economic performance does deteriorate, the Bank of England could decide on a further programme of quantitative easing (QE), as an alternative to cutting interest rates.
This would lower bond yields, and with them annuity rates. So anyone taking out a pension annuity could get less income for their money.
Investments and savings
Any rise in interest rates would be good news for savers.
But during the campaign, the Treasury argued that UK shares would become less attractive to foreign investors should we leave the EU, and would therefore decline in value.
In the longer term, this is by no means a certainty. Shares typically rise with company profits. Big exporters might benefit from the weaker pound, so the value of their shares might well rise, while importers might see profits squeezed.
Holidays and travel
A fall in the value of the pound will make holidays to the EU more expensive, as we will have to pay more for accommodation priced in euros.
David Cameron claimed that a holiday for four people for eight nights will cost £230 extra, as a result of sterling’s devaluation.
However, the cost of flights would depend on individual airlines, and whether the base price is in pounds or euros.
Both Easyjet and Ryanair have argued that flights will become more expensive, as a result of more restrictive aviation rules. But IAG, the owner of British Airways, has said a UK exit from the EU would not affect its business.
In the short-term there is likely to be plenty of volatility and natural instincts are to panic – but there isn’t always a need to. Hartey Wealth Management have designed our portfolios with volatility in mind and have a proven record of keeping performance up even in the most turbulent of times.