EU referendum: Morgan Stanley says June referendum will speed up uncertainty and slowdown in UK growth

Lauren Fedor
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Morgan Stanley economists are now expecting a June referendum (Source: Getty)

Morgan Stanley is now predicting the in/out vote on Britain's European Union membership will be held within a matter of months – something the bank's economists say would accelerate market uncertainty and spark a slowdown in growth.

In a note out this morning, Morgan Stanley economists said they now expect Prime Minister David Cameron will secure a reform deal at next month's European Council meeting, paving the way for a June referendum.

"We see the UK's 2016 prospects as dominated by the idiosyncratic risk of a vote to leave the EU, which we think will drive performance, policy and markets," the economists wrote.

"Previously, we had thought that negotiation complexity and Cameron's political need to demonstrate that he had got as substantive a deal as possible would delay an agreement beyond the crunch February 18-19 European Council, and push the referendum to the autumn.

"Now, with the UK making it a priority, and credible non-UK sources, such as Commission President Juncker, predicting a February deal, we think it is likely."

Morgan Stanley also warned that the UK leaving the EU would "trigger a major and sustained rise in political and economic uncertainty", and if public polling in the run-up to the vote points to Brexit, there will be a "greater" economic impact ahead of the referendum.

"In the run-up to the referendum we expect a dampening effect on GDP growth (particularly investment)" Morgan Stanley said. "With a June referendum (compared to our previous September/October base case), in combination with ongoing fiscal tightening, GDP growth in the second quarter is likely to be lower than we had expected."

The economists also said they expected the Bank of England Monetary Policy Committee (MPC) would delay raising interest rates until after the referendum.

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