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United Kingdom Monetary Policy November 2019

United Kingdom: BoE stays put in November but adopts dovish tone; two committee members call for cuts

At its meeting ending on 6 November, the Monetary Policy Committee (MPC) of the Bank of England (BoE) voted to keep the Bank Rate unchanged at 0.75%, as market analysts had expected. However, contrary to market expectations, 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, soft economic momentum and mild price pressures—inflation was below the Bank’s 2.0% target in August and September—meant that a rate hike was certainly not warranted. On the other, a majority of committee members judged that current tepid economic conditions did not yet call for a rate cut, as they can be attributed in significant part to Brexit, and economic fundamentals were still solid. Moreover, the Bank argued that the new Brexit deal agreed in October should dampen economic uncertainty going forward. The Bank’s Brexit assumption is now that of an orderly transition towards a “deep” trade deal between the UK and the European Union.

The Bank adopted a more 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. Given the BoE also revised down its forecasts for GDP growth and inflation, a rate hike next year now seems less likely and a rate cut is definitely on the cards, although panelists are still torn on the outlook.

According to Daniel Vernazza, an economist at UniCredit: “In our view, Brexit-related uncertainties will remain entrenched. We expect the MPC to cut rates by 25bp in 1Q20, 2Q20 and 3Q20.”

However, James Smith, an economist at ING, takes a different view: “While we expect 2020 to be another uncertain year for the UK economy, we still think it is probably still a little too early to be pencilling in rate cuts”.

Analysts at Nomura, meanwhile, sum up the situation succinctly: “One thing looks very likely to be true in any event, […] – that the dovish BoE is not about to raise rates over the next six months, which we had been assuming until today”.

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