Cable, Gilts Unimpressed As Bank Of England Warns Of Brexit, Hot Economy In 2019

Gilt yields and cable briefly rose after The Bank of England held its main lending rate unchanged in a unanimous decision with the forward guidance also unchanged ("Any future increases in Bank Rate are likely to be at a gradual pace and to a limited extent.") as policymakers weighed economic uncertainty sparked by Brexit against higher inflation expectations.

The main highlights in the statement has a slight hawkish bias, indicating that the MPC sees the output gap is closed and the economy will run hot from late 2019 amid growing wage and rising domestic costs;  the BOE also discussed Brexit, saying that the economic outlook will rely significantly on the nature of the EU withdrawal. The MPC judges that the monetary response to Brexit, whatever form it takes, will not be automatic and could be in either direction.

Key highlights from their statement (via RanSquawk):

  • Unanimous on the base rate: MPC votes 9-0 to stand pat on rates at 0.75%
  • Unanimous on corporate bonds: MPC votes 9-0 to maintain the stock of corporate bonds at GBP 10bln
  • Unanimous on APF: MPC votes 9-0 to maintain the stock of UK government bond purchases at GBP 435bln
  • Growth: Staff forecast GDP growth to have been around 0.6% in Q3 which is 0.2pp higher than forecast in the August QIR but growth is expected to fall back to 0.3% in Q4
  • Inflation: CPI inflation is forecast to remain above target for most of the forecast period before reaching 2% by the end of the third year
  • Brexit: The economic outlook will rely significantly on the nature of the EU withdrawal. The MPC judges that the monetary response to Brexit, whatever form it takes, will not be automatic and could be in either direction (same assumption as prior)
  • Rates: Future increases in the bank rate are likely to be at a gradual pace and to a limited extent
  • Wages: Regular pay growth has been stronger than expected, rising to over 3%.
  • Investment: Business investment has been more subdued than previously anticipated as the effect of Brexit uncertainty has intensified
  • Labour Market: Remains tight
  • Trade: Trade restrictions have increased and there is a risk of a further escalation

Below is a summary of the MPC's key judgments:

    And the key forecasts:

    • GDP Growth: 2018 Q4: 1.5% (Prev. 1.5%), 2019 Q4: 1.7% (Prev. 1.8%), 2020 Q4: 1.7% (Prev. 1.7%), 2021 Q4: 1.7%
    • CPI Inflation: 2018 Q4: 2.5% (Prev. 2.3%), 2019 Q4: 2.1% (Prev. 2.2%), 2020 Q4: 2.1% (Prev. 2.0%), 2021 Q4: 2.0%
    • Unemployment Rate: 2018 Q4: 3.9% (Prev. 3.9%), 2019 Q4: 3.9% (Prev. 3.9%), 2020 Q4 3.9% (Prev. 3.9%), 2021 Q4: 3.9%
    • Average Weekly Earnings: 2018: 2.75% (Prev. 2.5%), 2019: 3.25% (Prev. 3.25%), 2020: 3.5% (Prev. 3.5%), 2021: 3.75%

    With no surprises, markets have shrugged it all off, with gilt yield briefly popped then fading back:

    And cable largely unchanged too, and trading near session highs on last night's Times' story which has since been denied twice: