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Brexit: delaying the inevitable?

By Iakov Frizis, CASE

On Thursday, the United Kingdom’s Supreme Court surprised British Prime Minister Theresa May and the world by blocking the government’s prerogative powers over Article 50. The ruling stipulated that the government needs to consult the parliament before starting procedures for the country’s withdrawal from the EU.

Despite this setback, the British government appears to retain its strong pro-Brexit position. International Trade Secretary Liam Fox reiterated in the House of Commons the government’s determination to respect the result of the referendum, underscoring the latter’s disappointment in relation to the ruling, whilst Ms. May aims to appeal the court’s judgment. Meanwhile, the EU maintained a non-interference position, as the spokesman of the EC’s President, Jean Claude Junker, reaffirmed that the EU will not comment on internal legal issues in the UK.

The case against the government was brought to the highest court by a crowdfunded group calling itself the People’s Challenge to the Government, a group launched following the Brexit referendum. To cover legal costs, the group gathered pledges from 4,918 people amounting to £170,550.

The news of the results of this legal challenge appears immediately reverberated across markets, providing some relief for the beleaguered pound (which rose by 1.1% to US$1.2448). A subsequent surge came following the Bank of England’s (BoE) decision to maintain benchmark interest rate at 0.25%, till end of year, pushing the currency to $1.2493 (or a 1.6% rise). Meanwhile, on Friday morning, the pound traded around $1.246, with expectations of appreciation over the coming weeks.

Despite recent economic growth, the BoE is facing a less positive outlook than in August, as uncertainty over Brexit is coupled with a sharp rise of prices. BoE’s renewed forecast points to the biggest sustained overshoot of inflation since 1997, when BoE gained its policy independence, as inflation is expected to exceed the 2% target, reaching 2.7% over 2017 and remaining at that level throughout 2018.

The strengthening of the pound, coupled with BoE’s more hawkish tone and increased uncertainty relating to Brexit plans, has contributed to a re-evaluation of positions by firms engaged in trade; the FTSE-100, a largely exporter-based index, saw a slight drop in the wake of the decision.

Looking forward, this decision introduces a number of possible courses of action for the British government, all of which appear to exacerbate the rift in society, as MPs are called to vote to accept or reject the result of a referendum. Shortly after the court’s decision, prevailing opinion suggests that voting against the referendum is going to be a hard sell for MPs. This suggests that positive sentiment, linked to the court’s ruling, is expected to have only a temporary effect over markets, as traders closely tune into signals coming out of Westminster.

CASE — Center for Social and Economic Research is an independent, non-profit economic and public policy research institution, established in 1991 in Warsaw.

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