Despite soaring inflation in Europe, hedges appear cheap

Despite seeing major market swings following the 2016 Brexit referendum, we don’t expect Britain’s departure from the European Union (EU) to have any major economic effects in our baseline outlook for 2021 and beyond. Far more important are COVID-19, fiscal policy, and bigger questions around future productivity growth.

Strong money growth in Europe has raised concerns about inflation taking off. We have a different view.

The conditions for a relatively quick and robust rebound rest on the success in containing the virus within a reasonable horizon, and a well-calibrated economic policy response.

It was the day of coordinated policy moves in the UK, as both the Bank of England (BoE) and the government announced significant measures to counter the economic effects of the coronavirus. The synchronisation aims to amplify the impact of the actions taken, with the BoE helping credit flow to companies and freeing up fiscal space (via lower interest rates), and the Treasury announcing targeted virus-related measures to help households and small businesses.

While the UK election result reduces Brexit uncertainty significantly, it doesn’t eliminate it. Will there be an extension of the transition period? How will any deal affect the economy?

The U.K. is set to head to the polls on December 12. Here are our key takeaways for the economy and markets.