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UK CommentBoE kept policy rate and guiding unchanged - expects Brexit fog to clear soon

  1. Policy rate kept unchanged at 0.75%, vote was unanimous; QE programme also unchanged
  2. Forecast mostly unchanged
  3. Brexit uncertainty takes centre stage - the BoE chooses to be optimistic
Policy rate kept unchanged at 0.75%, vote was unanimous; QE programme also unchanged
As widely expected, the monetary policy committee (MPC) of the Bank of England (BoE) kept the policy rate unchanged at 0.75 percent at today’s meeting. The decision was unanimous. The QE program was also left unchanged, in line with our expectation and the market consensus. Also as we expected, the MPC left its policy guiding unchanged. The MPC repeated the message that were the economy to develop broadly as expected, a gradual tightening of monetary policy over the forecast period would be appropriate. The current conditioning path indicates two to three policy rate hikes by the end of 2021. However, the MPC made it very clear that the BoE’s current forecasts and monetary policy expectation depended critically on the nature of Brexit and warned that the Brexit uncertainty had intensified over the past months. As before, the BoE forecast assumes a smooth Brexit.
Forecast mostly unchanged
As a consequence of elevated Brexit uncertainty, business investment had been more subdued than the BoE had previously anticipated. However, as the BoE expects a smooth Brexit, it also anticipates that the fog will clear over the coming months, boosting business investment growth again. The BoE said that private consumption was still expected to grow modestly, and broadly in line with real incomes. The global economy had continued to grow above potential rates, supporting UK exports. However, growth had eased, and global downside risks were perceived to have risen. All in all, the BoE had made a small downward adjustment to its GDP projection for next year, but the rest of the trajectory until the end of 2021 remained unchanged, with growth hovering around 1.7 percent annually. However, the projections were finalised before the autumn budget was released, and according to Carney, the budget could, in isolation, contribute to boosting GDP growth next year. The MPC said that the labour market remained tight and that wage growth had picked up more than anticipated in the August inflation report. Domestic cost pressures were expected to build a little faster than previously expected, but on the other hand imported price pressures were expected to ease. All in all, wage growth expectations were lifted slightly for 2018, but the rest of the forecast remained unchanged, with wage growth increasing to 3 ¾ percent over the forecast horizon. The CPI forecast was slightly lower in 2019, but then somewhat higher in 2020. The unemployment forecast was left unchanged.
Brexit uncertainty takes centre stage - the BoE chooses to be optimistic
The Brexit uncertainty naturally took centre stage in today’s message from the Bank of England. The Bank chooses to be optimistic and assumes a smooth Brexit with greater clarity emerging over the coming months, pulling up business investment. The message from the BoE is contrasting today’s much weaker-than-expected manufacturing PMI, showing that UK manufacturing firms are becoming less optimistic regarding the future outlook. However, the BoE can do nothing but wait and see, and today’s unchanged monetary policy guidance was in line with what we expected. Contrary to the Bank of England, we believe Brexit uncertainty will continue to linger for a long time, effectively dampening GDP and wage growth. We therefore believe the BoE will be forced to call off expected policy rate hikes.


Kari Due-Andresen

Chief Economist Norway

Norway and UK

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