Unlike Sweden's Riskbank, which surprised this morning with its first rate hike in 7 years, a move that was expected by only 10 of 24 analysts polled by BBG, the Bank of England had nothing up its sleeve when its Monetary Policy Committee voted unanimously (9-0) to leave rates unchanged at 0.75% and warned that Brexit uncertainties had "intensified considerably" since its November meeting.
“The broader economic outlook will continue to depend significantly on the nature of EU withdrawal,” the minutes of the meeting said. “The monetary policy response to Brexit, whatever form it takes, will not be automatic and could be in either direction.”
With little idea whether the UK is going to leave the EU smoothly or crash out with no deal in March, the bank's Monetary Policy Committee for the first time gave no indication of how recent data were shaping its thinking on monetary policy, the FT noted. Instead, the central bank merely repeated what it had said at its November meeting — that if there was a smooth Brexit with a transition period, the economy was likely to need roughly one quarter point interest rate rise a year to keep inflation anchored to its target of 2 per cent. But turmoil since then puts that assessment in doubt.
As the FT notes, the MPC’s reticence in providing markets with any guidance was even starker because it noted that there had been significant changes in the UK and global economies since it last met to discuss interest rates in early November.
“Brexit uncertainties have intensified considerably since the committee’s last meeting,” the minutes of the meeting said. “The further intensification of Brexit uncertainties, coupled with the slowing global economy, has also weighed on the near-term outlook for UK growth”.
The BoE said it now sees inflation slowing below the 2% target as soon as January after oil prices fell. Nevertheless, stronger-than-anticipated wage growth and weak productivity suggest that underlying inflation pressures are building.
The economic outlook has weakened since the bank’s last round of forecasts in November. While growth was 0.6% in the third quarter, the BOE expects 0.2% expansion at the end of the year and about the same in the first three months of 2019.
Prime Minister Theresa May is running down the clock before putting her withdrawal agreement to a vote in Parliament. If lawmakers reject the deal, the risk of leaving the EU without a transition period rises. A disorderly Brexit would put the BOE in crisis-fighting mode - the pound would fall, fanning inflation, while new trade barriers would put the brakes on growth. The MPC said that the current monetary policy stance is “appropriate” for now, though it expects greater-than-usual short-term volatility in U.K. data.
While the MPC was generally downbeat on the changes to the UK economy since its last meeting, it noted that conditions in the labour market had improved further and this was likely to generate stronger inflationary pressure in the medium term. “Annual growth in regular pay had risen to 3.3 per cent, stronger than anticipated in the November inflation report, and the committee judged that near-term risks were slightly to the upside,” the MPC minutes of the December meeting said.
Separately, the MPC warned on growing inflation pressures, saying that with continued low productivity growth, rising pay was likely to increase firms’ costs and put upward pressure on prices. And the committee judged that Philip Hammond’s the late October Budget had also injected further spending into the economy which was likely to raise output 0.3 per cent over three years, further boosting inflationary pressure. But the MPC declined to give any assessment how it balanced these contradictory forces. All the committee was willing to say was, “the MPC judged at this month’s meeting that the current stance of monetary policy was appropriate”.
In response to the widely expected announcement, there were no notable reactions in assets, with cable dipping modestly after rising by nearly 100 pips earlier largely as a result of the sharp drop in the dollar.