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United Kingdom Monetary Policy December 2019

United Kingdom: BoE leaves rates unchanged in December but maintains dovish tone

At its meeting ending on 18 December, the Monetary Policy Committee of the Bank of England (BoE) voted to keep the Bank Rate unchanged at 0.75%, as market analysts had expected. As at the prior meeting, two committee members backed lower rates. The Committee unanimously agreed to maintain the stock of investment-grade corporate bond purchases at GBP 10 billion and the stock of UK government bond purchases at GBP 435 billion, financed by the issuance of Central Bank reserves.

On one hand, weak economic activity and inflation below the Bank’s 2.0% target meant that a rate hike was not justified. On the other, the labor market is strong, there is greater clarity on the domestic scene following the victory for the Conservative party in the December elections, and the purported U.S.-China trade deal has brightened the external outlook somewhat, meaning a rate cut was not yet called for either.

Also in December, it was announced that Andrew Bailey—the current head of the Financial Conduct Authority, the UK’s financial services regulator—will take over from Mark Carney as governor of the BoE from mid-March. The change is unlikely to have a significant impact on monetary policy.

The Bank maintained its dovish stance in its communiqué, stating that monetary policy “could respond in either direction to changes in the economic outlook” and explicitly highlighting the potential need for easing if global growth continues to ebb and Brexit uncertainty does not clear. Panelists are torn on the outlook for next year: while many see the BoE on hold or lower rates, others see some tightening.

According to Adrian Paul, an economist at Goldman Sachs: “In our central scenario, the UK does not confront another Brexit-related ‘cliff edge’ at the end of next year, excess demand contributes to domestically generated inflationary pressure, and the MPC raises Bank Rate by 25bps in November.”

However, analysts at UniCredit take an opposing view: “we expect Brexit uncertainties to continue and economic activity to fail to pick-up, forcing the MPC to cut the bank rate by 25bp in each of the first three quarters of 2020.”

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