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UK CommentPreview Bank of England: Policy on hold in September

  1. Inflation and GDP trends seem broadly on track with the BoE forecast
  2. Brexit uncertainty to prevent policy tightening ahead
Inflation and GDP trends seem broadly on track with the BoE forecast
The Monetary Policy Committee (MPC) of the Bank of England (BoE) will meet Thursday next week and release its decisions at 13:00 CET. Minutes from the monetary policy meeting will also be released. At its meeting in August, the MPC decided to increase the bank rate by 25bp to 0.75 percent and the decision was unanimous. In August, the BoE said it believed that the dip in UK output in the first quarter had been temporary, and that momentum would recover. The MPC’s assessment was that the labour market had continued to tighten and unit labour cost growth had firmed. The MPC saw the global outlook as a little softer. The BoE still expected annual GDP growth of around 1.75 percent ahead, and inflation was expected to stay a little above 2 percent before returning to target in 2021. The MPC said that, should the economy continue to develop broadly in line with the August projections, an ongoing tightening of monetary policy would be warranted over the forecast period to return inflation sustainably to the 2 percent target. The conditioning path (based on market rates) for the BoE forecast in August implied that the policy rate would be hiked two more times by the end of 2020, with the next hike expected in Q3 next year. The language used by the MPC in August was rather moderate, in our view, and the forecast was largely the same as in May. Since August, data has been scarce, and data recorded in the summer months is also highly volatile. Overall, new data seems to indicate that both inflation and real economy trends are broadly on track to meet the BoE’s short-term estimates.
Brexit uncertainty to prevent policy tightening ahead
The BoE is widely expected to keep monetary policy on hold in September. Given that economic trends so far seem well in line with the BoE’s expectations, there should be no reason for the MPC to prematurely tighten policy now. Furthermore, the fear of Brexit without a deal has risen markedly in the markets over the summer, and has remained high over the past few weeks. The BoE, in its forecast, has assumed a smooth and orderly Brexit. That assumption has always seemed optimistic to us, and currently, the outcome of Brexit seems as uncertain as ever. Given that Brexit Day is approaching fast and difficult political decisions still remain unsolved, we believe that the BoE in any case will stay on hold until the UK exits the EU in March next year. Our base case is that the BoE will be forced to stay on hold at least until the end of 2020 as Brexit continues to weigh on UK GDP and wage growth.


Kari Due-Andresen

Chief Economist Norway

Norway and UK

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