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UK CommentBoE in wait-and-see mode

  1. No change to policy; the votes were unanimous
  2. Forecast revisions mixed
  3. Brexit will prevent further hikes from the BoE, in our view
No change to policy - votes were unanimous
The Monetary Policy Committee (MPC) of the Bank of England (BoE), as expected, kept its policy rate unchanged at 0.75 percent. The QE programme was also left unchanged. The votes were unanimous.
Forecast revisions mixed
Since the February report, market interest rate expectations have fallen, much due to global events, and hence the conditioning path for the BoE’s economic forecasts was some 15 basis points lower in May. The May conditioning path implies only one more rate rise by the end of 2021. Thereafter, the conditioning path implies a flat policy rate until the end of the forecast horizon in Q2 2020. Compared with the February report, the forecast for GDP growth was a little higher. The BoE now expects GDP growth to increase from 1.5 percent this year to 1.6 percent in 2020 and 2.1 percent in 2021. According to the BoE, the boost to GDP in Q1 this year was expected to be temporary, as much was due to a larger-than-previously-expected boost from companies building stocks ahead of Brexit. Still, the BoE judged that the underlying pace of GDP growth appeared to be slightly stronger than previously anticipated, but nevertheless below potential. Employment growth had been strong, although survey indicators suggested that the outlook had softened. Most indicators of consumer spending were consistent with ongoing modest growth. With regards to consumer prices, CPI inflation had been slightly below the MPC’s 2 percent target in Q1 of this year and the BoE expected it to fall further below the target over the first half of the forecast period, and to a greater extent than was expected in February. On the other hand, CPI inflation at the end of the forecast horizon was expected to be a little higher than in the February report. According to the MPC, much of the downward revision in the shorter term was due to lower expected retail energy prices; however, there remained mixed signals from indicators of domestically-generated inflation ahead.
Brexit will prevent further hikes from the BoE, in our view
Monetary policy ahead will of course depend on Brexit and, as the BoE puts it, “on the nature and timing of EU the withdrawal”. As with everyone else, the MPC has found it hard to see through the Brexit fog. The MPC expected that some data in coming quarters could continue to be volatile and provide less of a signal than usual about the underlying path of the economy. The MPC seemed perfectly content just waiting and seeing at this stage, noting that “the cost of waiting for further information was relatively low”. The BoE repeated that an ongoing tightening of monetary policy over the forecast period, at a gradual pace and to a limited extent, would be appropriate. As mentioned, the conditioning path currently indicates one more rate rise by the end of 2021. While the BoE expects GDP growth to pick up notably over the next few years, we believe that Brexit uncertainty will continue to dampen economic growth in the UK ahead and that this, together with a further cooling of the global economy, will prevent the BoE from lifting the policy rate further.


Kari Due-Andresen

Chief Economist Norway

Norway and UK

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