Research
Tip: To personalise the research list, click the gear symbol above.


Choose type:


UK CommentBoE on hold as Brexit clouds outlook

  1. As expected, no change to monetary policy - policy rate kept at 0.75 percent
  2. Slower growth expected in the near term. Longer-term estimates affected by inconsistency due to Brexit
  3. We expect the BoE to remain on hold as it awaits Brexit... which will probably be postponed again
As expected, no change to monetary policy - policy rate at 0.75 percent
As expected, the Monetary Policy Committee (MPC) of the Bank of England (BoE) decided to keep the policy rate unchanged at 0.75 percent today. The QE programme was also kept unchanged. The decisions were unanimous.
Slower growth expected in the near term. Longer-term estimates affected by inconsistency due to Brexit
As expected, the BoE was rather cautious in describing the economic outlook. According to the BoE, underlying growth in the UK appeared to have slowed to a rate below potential due to intensifying Brexit-related uncertainties and weaker global growth. The BoE noted that global trade tensions and soft global activity had led to a substantial decline in advanced economies’ forward interest rates and a material loosening in financial conditions, including in the United Kingdom. An increase in the perceived likelihood of a no-deal Brexit had further lowered UK interest rates and led to a marked depreciation of the sterling exchange rate, according to the BoE. The BoE pointed to considerable data volatility as a result of Brexit uncertainties. The BoE now expects GDP to flat-line in Q2 after growing by 0.5 percent in Q1. Compared to the May forecast, the GDP forecast was lowered in the shorter end as Brexit continues to weigh on activity growth. However, from late 2020 onward, the GDP forecast was higher, caused by a lower conditioning path for market rates. The BoE’s forecast for unemployment was slightly higher in 2020-21 compared with the May Inflation Report. The BoE’s forecast for inflation was also slightly higher in the years 2020-21. However, it is important to note that the BoE’s projections are affected by an inconsistency, which the BoE also highlighted. One the one hand, the BoE has made its forecast based on an assumption of a smooth and orderly Brexit. On the other hand, the market rates, on which the BoE forecast is based, reflects market participants’ perceptions of the likelihood and consequences of a no-deal Brexit. Therefore, the conditioning path this time implies that the policy rate is cut to 0.5 percent early next year. The BoE noted that were it to become clear that Brexit will indeed proceed smoothly, market interest rates would likely rise and the sterling exchange rate would likely appreciate. A more consistent forecast would therefore have somewhat lower paths for GDP growth and CPI inflation than the one presented today.
We expect the BoE to remain on hold as it awaits Brexit... which will probably be postponed again
We thought today’s message from the BoE was rather balanced. We expect the BoE to remain on hold for now as it waits for Brexit. However, should the outlook deteriorate, we believe the BoE would cut the policy rate. Our base case is that Boris Johnson’s push for a no deal Brexit will trigger a general election and that Brexit therefore will have to be delayed once again. If so, Brexit uncertainty will continue to weigh on the economy for some time yet.

Disclaimer

Kari Due-Andresen

Chief Economist Norway

Norway and UK

kadu01@handelsbanken.no

Latest analyses

2019-08-19

Fast Comment Norway

2019-08-15

Fast Comment Norway

2019-08-15

Morgenrapport Norge