UK’s exit from the European Union after 43 years

The UK’s exit from the European Union after 43 years is now set to happen. The vote by a majority of British people to leave the European Union on Thursday 23 June represents a very significant decision for the UK, for the European Union and indeed for the wider global economy. The UK voted to leave the EU by 52% to 48%.

The Leave campaign won the majority of votes in England and Wales, while every council in Scotland saw Remain majorities. The referendum turnout was 71.8%, with more than 30 million people voting. It was the highest turnout in a UK-wide vote since the 1992 general election.

But what could this mean to our finances? It goes without saying that investors are going to have to hold on to their nerves through the coming days, months and even years. The markets have clearly been shocked by the decision, and, although unsettled, investors should look through this period of uncertainty and focus on longer-term opportunities.

There will be challenges in the near term, and there is likely to be a period of uncertainty as the exact terms of Britain’s exit from Europe are negotiated. There needs to be a period of managing political uncertainty, uniting a deeply divided population and ensuring the UK enters negotiations feeling economically strong rather than weak. The instability that we’ve experienced once it starts to settle down will mean that investors can focus on the UK’s future outside Europe and how it will affect their finances.

UK ready to face the future ‘from a position of strength’

For the UK to leave the European Union, it has to invoke an agreement called Article 50 of the Lisbon Treaty.

The Prime Minister, David Cameron, announced on Friday 24 June he would be stepping down as prime minister by October, and he or his successor will need to decide when to invoke Article 50 which sets in motion the formal legal process of withdrawing from the European Union and gives the UK a period of two years to negotiate its withdrawal.

On Monday 27 June, the Chancellor of the Exchequer, George Osborne, said that the UK is ready to face the future ‘from a position of strength’ and indicated there will be no immediate emergency Budget. He also said there would still need to be an ‘adjustment’ in the UK economy.

However, Mr Osborne said it was ‘perfectly sensible to wait for a new prime minister’ before taking any such action. He also said that only the UK could begin the process of leaving the EU by triggering Article 50 of the Lisbon Treaty.

European Union law will still remain in the UK until it ceases being a member, and the UK will continue to abide by EU treaties but not take part in any decision-making as it negotiates a withdrawal agreement and the terms of its relationship with the now 27-nation bloc.

Buffer for the economy

The value of sterling on Monday 28 June fell to a 31-year low as the effects of Brexit unfolded. Sterling dropped past $1.32 to $1.3192, its lowest since mid-1985, taking losses to 11.8% since the 23 June vote.

Given all the uncertainty, investors are pricing in a rate cut this year, with some analysts expecting the Bank of England to consider quantitative easing to provide a buffer for the economy. Within days of the Brexit result, gilt yields hit record lows with the 10-year benchmark dropping below 1%.

Many analysts expect the value of the pound to fall significantly in the medium term. A weaker pound means that buying goods or services from other countries will become more expensive, inflation will therefore be higher and goods being sold to other countries will become cheaper for the buyers.

Will the Bank of England cut interest rates?

Before the EU referendum vote, the Treasury predicted a vote for Brexit would mean a rise of between 0.7% and 1.1% in borrowing costs. The Prime Minister, David Cameron, claimed the average cost of a mortgage could increase by up to £1,000 a year.

The governor of the Bank of England, Mark Carney, speaking soon after David Cameron on Friday 24 June, stopped short of announcing an increase in interest rates to defend the pound, which would have affected millions of households on tracker-style mortgages. Mr Carney has promised £259bn to calm the markets.

Each half-point change in rates adds or subtracts approximately £25 a month to most people’s repayment mortgages. Those with interest-only mortgages would see steeper changes – around £42 a month for every 0.5% rate change.

Already post-Brexit there have been signs that new fixed-rate mortgage deals could drop – with many more coming in below 2% – in response to changes in the bond markets. A rise in interest rates could also affect those in rented accommodation, as costs for landlords would go up.

But if the vote for Brexit brings a period of low growth, some economists are suggesting the Bank of England will cut interest rates. In which case, the cost of lending could actually fall.

Some uncertainty and concerns from consumers could lead to a stalling in the housing market, although it will take a longer period to see the full economic effects of Brexit.

The International Monetary Fund (IMF) announced that Brexit could result in the fall in house prices, and this was on the expectation that the cost of mortgages may rise.

The Treasury also said house prices could fall by between 10% and 18% over the next two years, compared to where they otherwise would have been, which for first-time buyers is good news.

The National Association of Estate Agents (NAEA) believes house prices in London could see the biggest downward change over the next three years, compared to where they otherwise would have been.

Elsewhere, the NAEA said values could fall, but since it expects prices to continue rising anyway this means a slower rate of increase rather than a fall in real values.

Make sure your plans remain on track

The UK’s exit from the European Union after 43 years surprised markets. It is important to keep this event in context – this is far from the global financial crisis of 2008. This is a time for investors to concentrate on long-term fundamentals and to remain focused on meeting their investment goals. If you want to discuss your particular situation post-Brexit to ensure that your plans remain on track, please contact Admiral Wealth Management on 01472 357035 or email