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United Kingdom Monetary Policy January 2020

United Kingdom: BoE leaves rates unchanged in January on recent positive data but cuts growth forecast

At its meeting ending on 29 January, the Monetary Policy Committee of the Bank of England (BoE) voted by a seven-two majority to keep the Bank Rate unchanged at 0.75%, as market analysts had expected. 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.

The Bank’s decision to remain on hold was likely influenced by recent positive economic developments at home and abroad. On the external front, economic data for end-2019 and early 2020 painted a more positive picture of the global economy, while the “phase-one” U.S.-China trade deal seems to have reduced external risks. Domestically, the UK’s manufacturing and services PMIs surged in January as political uncertainty receded. This was enough to encourage the BoE to overlook muted domestic price pressures—inflation was well below the 2.0% target in December. The Bank’s decision also came despite its meager projections for GDP growth, which were downgraded to 0.8% and 1.5% in 2020 and 2021 respectively (previously: +1.3% and +1.8%).

The BoE left the door open to near-term rate cuts, stating that monetary policy “may need to reinforce the expected recovery in UK GDP growth should the more positive signals from recent indicators of global and domestic activity not be sustained or should indicators of domestic prices remain relatively weak”. Looking further ahead, the Bank continued to signal potential rate hikes. Panelists are torn on the outlook for this year: While many see the BoE holding or lowering rates, others see some tightening.

According to Adrian Paul, an economist at Goldman Sachs: “Our own central forecast embodies a material acceleration in underlying GDP growth through the second half of 2020. […] we continue to expect no change in Bank Rate over the coming months, and we envisage the MPC turning towards tighter policy towards the end of 2020.”

However, Daniel Vernazza, an economist at UniCredit, is notably less upbeat: “We continue to expect the MPC to cut the bank rate to zero this year. The MPC’s updated economic projections were conditioned on “an immediate but orderly” move to a “deep free trade agreement” between the UK and the EU at the beginning of next year. In contrast, we think only a bare-bones trade agreement is in the offing, Brexit-related uncertainties will linger, and global growth will remain weak.”

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