BoE takes a ‘dovish turn’ ahead of UK Christmas election - Reaction

 

  • BoE leaves bank rate on hold at 0.75pct with 7-2 majority
  • In surprise dissention, MPC’s Saunders and Haskel vote for 25bp cut
  • Dissenters wanted reduction due to downbeat global economic outlook
  • Bank staff upgrade near-term GDP growth but downgrade further outlook

 

London, 7 Nov (LS NEWS) – As expected, the Bank of England’s Monetary Policy Committee (MPC) kept its bank rate and bond purchases unchanged Thursday, and BoE Governor Mark Carney warned that the UK could fall into recession if it cannot secure an agreement with Brussels before leaving the EU.

 

In a surprise spit, the MPC voted 7-2 to maintain the Bank Rate at 0.75pct but were unanimously behind keeping the stock of UK government bond and non-financial investment-grade corporate bond buys at GBP435bln and GBP10bln, respectively.

 

Market reaction was most evident on the vote, with sterling dropped sharply. Cable fell just over 50 pips from a pre-announcement 1.2860to 1.2806 lows post. For bond markets, UK 10-year bond yields fell from 0.76pct to 0.739pct.

 

With a Christmas election just six-weeks away, two members of the committee, Jonathan Haskell and Michael Saunders voted in favour of cutting rates. Both members said they judged that some immediate extra stimulus was required to ensure a sustained return of inflation to target. They listed a modest but rising amount of spare capacity, subdued core inflation, and a turning labour as reasons for acting now.

 

However, the committees’ message was still ambiguous, “If growth stays weak, interest rates could fall. If growth recovers as expected, rates may need to rise.”

 

The MPC has been guiding towards a more dovish stance over recent meetings and announcements. However, some central bank watchers questioned the timing of Thursdays change in the vote.

 

Kerstin Braun, president of Stenn Group, said: "The MPC has been hinting at a rate cut for a while, with or without a confirmed Brexit deal, but it’s likely to be at least three more months of paralysis before we see a move.”

 

Bank staff predicts inflation slowdown, cuts longer-term growth forecasts

 

The BoE blamed its more pessimistic view of the UK economy on a weak global growth outlook. Near-term GDP growth was revised higher, from 0.2pct to 0.4pct quarter-on-quarter to leave its estimated annual GDP expansion rate projection at 1.4pct. The annual growth rate for 2020 was cut to 1.2pct from 1.3pct and to 1.8pct from 2.3pct for 2021.

 

On inflation, the bank said staff now put one-year CPI at 1.51pct (v August’s 1.90pct estimate), two-year ahead CPI at 2.03pct (v 2.23pct in August), and three-year ahead CPI at 2.25pct (2.37pct).

 

The bank also changed the language of its view on the Brexit process and the most favoured outcome. Its assumption about the UK’s eventual trading relationship with the EU now states: “The MPC’s projections are now conditioned on a transition to a new trading relationship between the UK and EU.”

 

ING Economist James Smith said, “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. While the bank is now hinting more directly at potential easing, we think the fact that they are still formally projecting excess demand in their forecasts and keeping the door open to rate hikes in their statement, suggests policymakers are reluctant to follow the Federal Reserve and the European Central Bank into rate cuts just yet.”

 

--- Harry Daniels

@HarryDaniels71