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UK CommentBank of England in Brexit wait-and-see mode

  1. Policy rate unchanged at 0.75%; QE program also unchanged
  2. BoE says future monetary policy will depend on Brexit and could be in either direction
  3. We believe Brexit will force the BoE to stay on hold for the next two years
Policy rate unchanged at 0.75%; QE program also unchanged
As widely expected, the Monetary Policy Committee (MPC) of the Bank of England (BoE) decided to keep its policy rate unchanged at 0.75 percent at today’s meeting. The QE program was also unchanged. The decisions were unanimous. The BoE has so far assumed a smooth and orderly Brexit, which is also why it has expected GDP growth to hold up around 1.7 percent over the coming two years. Today, however, the BoE focused mostly on downside risks. The MPC noted that the near-term outlook for global growth had softened and that downside risks to growth had increased. In addition, the MPC underlined that Brexit uncertainties had intensified considerably and that these uncertainties were weighing on UK financial markets. Consequently, the outlook for the UK economy had softened, it said. The BoE said that judging the appropriate stance of monetary policy required separating shorter-term volatility caused by Brexit uncertainty from more persistent factors affecting inflation and the economy, which could only be done once greater clarity emerged around the nature of Brexit. Regarding future monetary policy, the BoE noted that in November it had expected an ongoing tightening of monetary policy over the forecast horizon, but that this expectation was based upon an assumption of a smooth and orderly Brexit. Now, it simply said that the broader economic outlook will depend on the form of Brexit and whether the transition to the new state is abrupt or smooth. The MPC therefore judged that the monetary policy response to Brexit will not be automatic and could be in either direction.
We believe Brexit will force the BoE to stay on hold for the next two years
The BoE, like everyone else, is in Brexit wait-and-see mode. It seems pretty clear that the policy rate in the UK will not be hiked until we know more about the UK’s future relationship with the EU. Market pricing currently indicates the first hike from the BoE could come early in 2020. Our expectation is that Prime Minister Theresa May’s Brexit deal will not be passed by the UK parliament and that there will be either a new referendum or a general election. If we are right, Brexit will have to be postponed probably until the end of 2019 or beyond, if it happens at all. In that case, Brexit uncertainty will continue to linger for a long time yet, taking its toll on the economy. We therefore believe the BoE will stay on hold the next two years.

Source: Macrobond


Kari Due-Andresen

Chief Economist Norway

Norway and UK

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