BoE keeps the ‘pause’ mode unchanged – UOB

Researchers at UOB Group assessed last week’s BoE event.

Key Quotes

“As widely expected, the Bank of England (BoE) kept monetary policy unchanged. The monetary policy committee (MPC) voted unanimously to maintain the Bank Rate at 0.75%. The MPC also voted unanimously to maintain the stock of corporate bond purchases and UK government bond purchases”.

“The forward guidance was largely maintained, but modified slightly, as the BoE wrapped up its accompanying statement, saying that “Assuming a smooth Brexit and some recovery in global growth, a significant margin of excess demand is likely to build in the medium term. Were that to occur, the Committee judges that increases in interest rates, at a gradual pace and to a limited extent, would be appropriate to return inflation sustainably to the 2% target”.

“The Bank’s updated projections in its quarterly Inflation Report outline a slower pace of economic growth in the near-term owing to intensified Brexit uncertainty and a more pronounced deceleration in economic activity. However, the BoE’s projections for GDP growth and inflation in the medium term were revised higher due a fall in market interest rate expectations which are imposed in the Bank’s forecasting exercise. The UK economy is now forecast to grow at a rate of 1.3%, down from an earlier projection of 1.5% in May. Meanwhile, growth forecasts until 2020 were cut to 1.3% from 1.6%. Again, these forecasts are premised on Brexit going smoothly”.

“As reflected in the BoE’s minutes and subsequent press conference by BoE Governor Mark Carney, the BoE “is less confident than usual about the outlook for the UK economy because of Brexit”, but offered little new insights into the impact of a no-deal Brexit scenario ahead of the 31 October deadline. This is the first monetary policy meeting since Boris Johnson became UK PM”.

“Yet, the main takeaway continues to be the fact that “monetary policy response to Brexit, whatever form it takes, will not be automatic and could be in either direction”. In this regard, because a no-deal Brexit could cause as much damage to the supply side of the economy as the demand side, rate hikes to fend off inflation pressures cannot be ruled out. Nonetheless, we think it is very unlikely the BoE will embark on the tightening mode that it is still loosely signaling at this meeting. Alternatively, if a Brexit deal is successfully put into place, the case for tightening may re-emerge. This, however, looks increasingly questionable now, given the proximity of the 31 October deadline”.