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United Kingdom Monetary Policy May 2019

United Kingdom: BoE leaves rates unchanged in May

At its meeting ending on 1 May, the Monetary Policy Committee (MPC) of the Bank of England (BoE) voted unanimously to keep the Bank Rate unchanged at 0.75%. The Bank was also in full agreement to maintain the stock of investment-grade corporate bond purchases at GBP 10 billion and to maintain the total stock of UK government bond purchases at GBP 435 billion, financed by the issuance of Central Bank reserves. All decisions were in line with market expectations.

The BoE remains in wait-and-see mode given the lack of clarity over the outcome of Brexit. Moreover, inflation is fairly mild, tracking slightly below the Bank’s 2% target so far this year, and the BoE sees inflation being lower than previously anticipated in the near-term due to weak retail energy prices. This meant the Bank was under little pressure to continue its tightening cycle.

In its communiqué, the BoE reiterated its guidance that monetary policy will likely tighten “at a gradual pace and to a limited extent” going forward. However, a rate hike is unlikely until Brexit uncertainty lifts. The Bank also left the door open to monetary easing in the case of a disorderly withdrawal. Following the rate announcement, governor Mark Carney struck a hawkish tone, stating that markets are currently underestimating the extent at which rates will rise going forward.

According to Kallum Pickering, an economist at Berenberg: “Seldom do central banks say so clearly […] that the market has got it wrong. […] As monetary policy operates with a lag, and as the BoE expects inflation to rise above its 2% target by the end of 2021, the signaled normalisation is likely to be front-loaded. If the UK government sorts the Brexit mess out soon…or is clearly on such a path, a rate hike as soon as August remains on the cards.”

However, Daniel Vernazza, an economist at Unicredit, is less convinced. Vernazza explained that, “given the MPC’s forecast for inflation to remain below the 2% target over the next year, ongoing Brexit-related uncertainty, and recent volatility in UK macro data, the central bank has no immediate urgency to hike.” On this basis, he concluded: “We continue to expect the MPC to remain on hold this year and to cut rates twice next year.”

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