The Bank of England very rarely causes a stir in financial markets. Given the looming proximity of the next seemingly crucial Brexit deadline and the uncertainty over a deal or no-deal, it should come as no surprise that the MPC has done very little different today. But is that it? We look at the impact of today’s decision.
No change to rates as expected, whilst the MPC voting committee was unanimous at 0-0-9. A look at the main economic projections makes for intriguing reading. They reflect a Bank hamstrung by Brexit uncertainty. Inflation and growth remains muted for now, but both are expected to pick up. However, the rate hiking bias of the coming years is no longer there in the forward market interest rates, with a 25 basis point cut priced for next year. The question is, without Brexit, would this still be the case?
The projection has been mildly downwardly revised to +1.7% (from +1.8%), before picking up again in subsequent years. Interestingly it is expected to pick significantly above the 2% target in 2021 and 2022. The impact of sterling weakness would be a factor here, but this is a reflection of a hawkish bias still from the Bank of England. Core inflation is expected to be little changed from its +1.8% of June for the rest of the year. Effectively, if this were to be the case that Brexit uncertainties were not in play, such a projection would be ripe for rate hikes.
Growth is expected to pick up after a dip in 2019 and remain “robust over the forecast period”. However, another takeaway is the wide levels of variance within the growth fan below. In short, the projection is massively dependent on variables, ie. Brexit.
The rate is expected to continue to track lower in Q3, falling back to 3.7% before stabilising around 4.0% next year.. Added to the continued positive aspect of wage growth this shows a tight labour market. The BoE reflects this in its Ph