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12 September 2018

 

-          Bank of England to keep Bank rate at 0.75% in a unanimous vote

-          To put emphasis on risk of further tightening on inflationary no-deal Brexit

-          Lack of Brexit progress to reinforce resolution to pause in monetary policy

-          May 2019 seen as realistic opportunity for the MPC to hike rates again

 

Settling in for the long haul, the Bank of England (BoE) is widely expected to commence a wait-and-see approach this week in preparation for the potential fallout from a Brexit withdrawal agreement early next year.

 

Consensus amongst traders remains for the Monetary Policy Committee (MPC) to unanimously keep its key interest rate unchanged at 0.75pct, with no changes to the GBP435Bln total gilt purchases and GBP10Bln corporate bond programmes.

 

Set for release on Thursday, 13 September at 1100 GMT, LiveSquawk will cover the announcement live from the Bank of England for both its print and audio services.

UNITY WITHIN NEW MEMBERSHIP

Adopting a stance of gradualism imposed by Governor Mark Carney, a vote to hike rates at consecutive meetings from the MPC members would be inconsistent. Therefore, it seems highly unlikely for any member to make the case for raising rates within the next six months.

 

A unanimous vote is expected to be supported by new external member Jonathan Haskel, replacing the relatively hawkish McCafferty who left the MPC at the end of August.

 

Supporting the view that Haskel is unlikely to break ranks in his initial vote, HSBC economist Chris Hare notes, “Before we get a clearer steer, we think it’s sensible to assume that Mr Haskel will slot into the MPC’s consensus position. The committee does not appear to have acquired an arch dove.”

MIXED ECONOMIC PERFORMANCE

This week’s insight into the UK economy presented an encouraging image as growth accelerated at the start of Q3, following a sluggish start of summer. With quarter-on-quarter GDP growth surpassing the central bank’s 0.4pct target, the committee is likely to acknowledge the upside risks.

 

However, analysts at Pantheon Macroeconomics propose that a short-term gain is unlikely to prompt any change from the MPC, noting “the concentration of the upside surprise in weather sensitive sectors, combined with the continued weakness of surveys, suggests that growth will slow again in Q4.”

 

Pantheon economists conclude that historically “the MPC rarely makes a wholesale reassessment of its views at meetings that are unaccompanied by its Inflation Report.”

 

Headline inflation continued to undershoot the MPC’s forecasts in July as sterling’s depreciation pushed up input prices. As the boost from higher import prices begin to fade and domestic price pressures are subdued, a further reduction in the inflation rate can be predicted reinforcing the Committee’s gradual approach. 

BREXIT UNCERTAINTY WEIGHING

Despite no real Brexit progress since August meeting, the European Union has begun to show more flexibility and optimism in negotiating talks. Recent sterling strength have been supported from comments from EU’s chief negotiator Michel Barnier who believed six to eight weeks was a “realistic” target for a Brexit deal.

 

Conversely, Barnier reiterated his distain with the UK PM Theresa May’s Chequers Brexit plan, describing it as “unworkable.” Similarly, adding to delays in concluding the withdrawal agreement, he remained “open to discussing other backstops” for the Northern Irish border.

 

Despite recent speculation on his future, Governor Mark Carney agreed to extend his term at the helm of the Bank of England to support a smooth and successful Brexit. However, the seven-month extension was shorter than some expected, falling short of the entire transition period ending on 31 December 2020.

 

Uncertainty surrounding Brexit has failed to fade over time, with the threat of a no-deal Brexit scenario ramping up. Despite tentatively encouraging signs, the lack of concrete progress will reinforce the central bank’s resolution to take a pause in its monetary policy.

 

Analysts at ING Economics suspect it will take some time for the Bank of England to confidently raise rates again, even if a fractious and gruelling approval process is avoided.

 

“Even if a solution is eventually found, confidence is likely to take much more of a hit in the first quarter and growth momentum would likely slow. In this case, we suspect the Bank would keep rates on hold for longer to monitor how the economy recovers."

 

Peter Devlin – LiveSquawk News

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