While the BOE kept rates unchanged at 0.75% as expected, two surprise dissents appeared as Michael Saunders and Jonathan Haskel wanted to lower the benchmark by a quarter point with consensus looking for a unanimous decision. The dissenting duo - which cited threats to the outlook and signs of a turn in the labor market - represented the first votes for looser policy since 2016.
While Saunders had been mentioned as a possible dissenter this month, Haskel’s vote for a cut is a surprise.
“If global growth fails to stabilize, or if Brexit uncertainty remains entrenched, monetary policy may need to reinforce the expected recovery,” the BOE warned in the summary of the meeting. The BOE also cautioned that if the risks don’t materialize, their previous guidance that limited and gradual hikes may be needed still stands.
Haskel and Saunders dissented on the basis that downside risks to the Bank’s projections have emanated from a softer global outlook and more persistent Brexit uncertainties affecting corporate and household spending. However, this stance was out-voted by the broader view that there is currently not enough data points available to assess the impact of the aforementioned concerns held by those wishing for a rate reduction, as RanSquawk notes.
In response to the surprising dissenters, the pound dove sharply and hit the lowest level in more than a week, dropping as much as 0.3% to 1.2818, the lowest since Oct. 29, as much as 60 pips from the intraday high of 1.2878. Separately, Gilts pared declines and curve steepens as money markets price 19bps of BOE rate cuts in December 2020 versus 15bps on Wednesday.
The comments showed that the BOE is shifting closer to other central banks which have already cut interest rates this year. Still, signs of easing in the China-U.S. trade tensions on Thursday could be good news for the global economy and mean less chance of a worse scenario emerging.
In the re-branded Monetary Policy Report, officials also cut their forecasts for growth and inflation. The projections highlight the impact of the global slowdown, with external factors accounting for most of the downgrade. Some other highlights from the BOE statement, courtesy of RanSquawk:
- Rate guidance: Monetary policy could respond in either direction to changes in the economic outlook in order to ensure a sustainable return of inflation to the 2% target. If global growth fails to stabilise or Brexit uncertainties remain entrenched, monetary policy may need to reinforce the expected recovery in UK GDP growth and inflation. If these risks do not materialise and the economy recovers broadly in line with the MPC’s projections, monetary policy could be tightened at a gradual pace and to a limited extent. Note, the MPC have removed guidance on the event of a no-deal Brexit.
- Brexit: As a result of the UK and EU striking a deal on the WA and Political declaration and extension to A50, the perceived likelihood of a no deal Brexit has fallen markedly.
- Underlying assumptions of projections: Projections are based on the assumption of an orderly transition to a deep free trade agreement between the UK and the EU. The assumptions conclude no tariffs on UK-EU trade, whilst customs checks on UK-EU trade are introduced, some services trade would be subject to greater barriers, regulatory barriers with the EU are likely to gradually increase, the UK replicates a substantial proportion of EU trade agreements with non-EU countries. Full details can be found on Table 1, page 12 of the MPR.
- Domestic growth: UK GDP has slowed materially this year and reflects weaker global growth, driven by trade protectionism and Brexit-related uncertainties. The agreements struck between the UK and EU are expected to remove some of the uncertainty facing businesses and households and as such, the MPC expects growth to pick up in 2020.
- Inflation: Inflationary pressures are expected to lessen in the near term. Inflation is expected to fall to around 1.25% by the spring, owing to the temporary effect of falls in regulated energy and water prices. In the second half of the MPC’s forecast period, however, domestic inflationary pressures are expected to build before rising to slightly above 2% at the end of the forecast period.
Elsewhere, one key aspect of the minutes release was the Bank’s updated view on Brexit which underpinned the accompanying projections in the MPR. Policymakers noted that as a result of the UK and EU striking a deal on the WA, Political declaration and extension to A50, the perceived likelihood of a no deal Brexit has fallen markedly. As such, the MPC now assume an orderly transition to a deep free trade agreement between the UK and the EU. With this in mind, the MPC opted to remove guidance on what action would be taken in the event of a no deal Brexit, whilst reiterating their mantra to respond in either direction to ensure “a sustainable return of inflation to the 2% target”.
Furthermore, the Bank reassured markets once again that a period of “entrenched uncertainty” could be a cause to act, however, if these risks do not materialise and the economy recovers broadly in line with the MPC’s projections, “monetary policy could be tightened at a gradual pace and to a limited extent”. Overall, the latest communication from the Bank suggests less concern over the possibility of a no deal Brexit, given the increased clarity on the potential path for the UK and EU’s future trading relationship, however, a further prolongation of the Brexit process could see the BoE provide the UK economy with further monetary loosening.
In terms of the MPC’s assessment of the UK economy as detailed in the accompanying Monetary Policy Report, the Banks messaging was somewhat muddled after opting to abandon direct comparisons for their quarterly projections with the August report given the dichotomy between market pricing and their assessment of the economy (market placed a lot more focus on the prospect of a no deal, whereas the Bank now does not envisage this). The Bank provided adjusted previous’ for quarterly projections, however, opted to not included any adjusted previous’ for the annual figures (to the bemusement of the journalists at the press conferences).
As such, any comparison between the Banks view in November and August is difficult with the MPC trying to guide market expectations more towards the overall contents of the latest MPR rather than a contrast to the August QIR. In terms of what the November MPR tells us, the MPC expected UK GDP to pick up from 1.0% this year to 1.6% by the end of 2020, 1.8% in Q4 2021 and hit 2.1% by the end of the forecast period. The perceived trend of growth is predicated on the assumption of a reduction in uncertainty, albeit investment spending is held back by slower global growth.
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The U.K. is headed for a general election in December, and the country’s deadline to leave the EU has been postponed until Jan. 31. While Brexit is dominating the economic outlook, there’s also no escaping the slowdown in global growth.
The BOE devoted a whole section to trade protectionism and the global outlook. The trade dispute between the U.S and China has caused a fundamental shift in policy after a 50-year trend towards liberalization, boosted uncertainty and weighed on growth, the BOE said.