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UK CommentBoE: monetary policy unchanged, but tone slightly more dovish

  1. Policy rate unchanged at 0.75% - decision was unanimous
  2. Economic development broadly on track, but increased global risks and intensified Brexit uncertainty
  3. Brexit will force the BoE to stay on hold for the next two years, we believe
Policy rate unchanged at 0.75% - decision was unanimous
As widely expected, the Monetary Policy Committee (MPC) of the Bank of England (BoE) left monetary policy unchanged at its September meeting, after having hiked the policy rate in August. The decision in September was unanimous, also as we expected. According to the MPC, recent news in UK macroeconomic data had been limited, but the August projections appeared to be broadly on track. UK GDP grew by 0.4 percent in Q2 and by 0.6 percent in the three months to July. The UK labour market had continued to tighten, with the unemployment rate falling to 4.0 percent and the number of vacancies rising further. Regular pay growth had risen to around 3 percent on a year earlier. CPI inflation was 2.5 percent y-o-y in July. Regarding the global economy, the MPC noted that growth rates were still above trend, but recent developments were likely to have increased downside risks. Particularly the announcements of further protectionist measures by the United States and China, if implemented, could have a more negative impact on global growth than was anticipated at the time of the August Report.
Brexit will force the BoE to stay on hold for the next two years, we believe
The MPC reiterated that were the economy to continue to develop broadly in line with the BoE's projections, an ongoing tightening of monetary policy over the forecast period would be appropriate. However, regarding Brexit, the MPC noted that since the August meeting, there had been indications of greater uncertainty about future developments in the Brexit withdrawal process. The MPC underlined that its outlook for the UK economy and expectations for further monetary policy tightening, hinged upon the assumption that the Brexit adjustment process would be smooth and orderly. All in all, the MPC struck a somewhat more dovish tone today than in August, we thought, pointing to global risks and Brexit uncertainty. While the market currently prices two more hikes from the BoE by the end of 2020, we believe the BoE will be forced to remain on hold. We believe a limited Brexit deal, covering only the most urgent Brexit, issues can be agreed before March. However, we believe that everything else, including the future trading relationship, will be left for negotiations after Brexit. Therefore Brexit uncertainty will linger for a long time still, dampening GDP growth and wage growth, we believe.


Kari Due-Andresen

Chief Economist Norway

Norway and UK

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