The BoE’s Monetary Policy Committee (MPC) kept Bank Rate unchanged at 0.75% as of November 07, 2019. However, unexpectedly two private members of the MPC voted to reduce interest rates in the November meeting, while others including Chief of the Bank of England (BoE) -Mark Carney, voted to keep interest rate steady at 075%. BoE’s chief and those who voted for an equal stance stated that they would consider a rate cut if global headwinds and Brexit uncertainties do not ease.
To date, the Bank of England has resisted participating in global rate cut trend following the United States Federal Reserve and European Central Bank who slashed their main interest rate in order to boost demand and investment sentiment.
BoE Chief stated that the major scenario was that the slowdown in global economic growth would stabilise and the PM Johnson’s withdrawal deal which British Parliament has approved, indicated the way to a reduction in Brexit uncertainty. He added that if this will turn around, the BoE would still have headroom for a slow and gradual interest rate hike. But if the future outlook deteriorates, then a rate cut would be more likely to take place.
However, two member of the BoE’s Monetary Policy Committee- Michael Saunders and Jonathan, who voted in favour of a rate cut during the November 07, 2019, MPC meeting, argued that it was already high time to act.
Also, BoE is also concerned with December 12, 2019, snap election uncertainties, which had been invoked by PM Johnson, in an attempt to get a majority at the House of Commons to get his Brexit deal through in the British Parliament.
The Brexit related fog is the root cause behind the dampening UK spending, in particular, a number of firms that reported high uncertainty related to the UK exit from the EU had been significantly elevated and businesses on an average assume Brexit to weigh adversely on their top line. Consumer spending has been more buoyant to the worries around Brexit, although these seem to have weighed on housing and some optional spending. While household spending has been bolstered by strong real income growth, growth in spending has somewhat softened, and the household saving rate has moved up over the past couple of years, despite the strong situation in the labour market.
In the MPC report, it was stated that underlying GDP growth in the United Kingdom over the past couple of years has been volatile, reflecting the impact of a global slowdown, which is growing at the slowest pace since 2009. The root cause behind the present slowdown is the surge in trade protectionism and domestic softness in some large developing economies.
BoE also pointed out that entrenched weakness in the world economy has led to softened demand for the UK exports and increased protectionism has heightened global uncertainties, which is negatively impacting the investment spending in many countries, including the UK.
CPI Inflation has been close to 2% in recent months, averaging 1.8% during 2019 Q3. Since a year-over period, inflation in the UK has softened, supported by lower goods price inflation, driven partly by the evaporating effect from the British Pound’s previous devaluation, however, core services price inflation has increased. That is consistent with a rise in domestic price pressures and is likely to reflect the gradual pass-through of the strong pickup in pay growth over the past few years
The BoE’s inflation forecasts suggest there will be no immediate pressure in the near term to raise interest rates. Inflation is all set to fall sharply in the spring, due to planned cuts in regulated energy and water bills
Meanwhile, BoE’s MPC estimated that the Brexit related headwinds that households, businesses and financial markets have been experiencing are estimated to slow gradually, which will boost pickup in household and especially business spending. The progress of the Brexit deal and Britain’s EU membership getting prolonged are expected to reduce some indecision and boost trust in the near term, in part driven by a drop in the risk of a no-deal Brexit. Some ambiguity is likely to stay, however, as the details of the UK and EU’s final relationship are believed to emerge only gradually over time and the ease of the shift to it remains to be established.
However, the British Parliament for the first time, on October 17, 2019, had approved the second reading of a Bill to implement the Brexit deal decided between Britain and EU, with the broad partnership with a free trade agreement at its core.
This has also supported sterling appreciation, as a no-deal kind of Brexit situation is now completely out of the discussion and sterling expanded almost 4% since PM Johnson announced the snap election, which wiped out chances of a no-deal kind of the UK’s exit. However, Sterling ended lower post-BoE hinted for a possible interest cut in order to deal with Brexit related uncertainties. On November 08, 2019, (at the time of writing at 09:53 AM GMT), Pound Sterling traded 0.10% lower at $1.2808, against the US dollar.
The labour market remains tight, and this has caused pay and domestic cost pressures to increase. However, employment growth has weakened recently, and the slowing in demand growth has caused a margin of spare capacity to open up. CPI inflation has been close to target in recent months, although lower energy prices and water bills are likely to make it fall over the next few quarters.
This has already been accepted that uncertainty related to Brexit has affected large purchases and discretionary spending by households, the housing market has underperformed since 2016, as households defer purchases given the large costs involved. Also, car sales in the UK have been plummeting; though the changes in emission, regulation have made recent numbers difficult to interpret.
However, BoE’s economic growth expected for the next couple of years is from 1.4% in 2019 to 2.0% in 2022. The MPC also mentioned that Britain’s 2022 expected growth rate is above its long-term trend and would push inflation above the UK’s benchmark 2.0% set by BoE.