Bank of England Keeps Rates Unchanged, Warns On Brexit Uncertainty

As expected, the Bank of England kept rates on hold at 0.75% in a unanimous decision, while warning again that uncertainty surrounding Brexit may weaken inflation forcing more easing in the future.

MPC voted unanimously to keep #BankRate at 0.75% pic.twitter.com/hH1ep4EMBG

— Bank of England (@bankofengland) September 19, 2019

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In line with recent decision, the BOE linked its monetary policy to the outcome of Brexit saying that “political events could lead to a further period of entrenched uncertainty,” and adding that “the longer those uncertainties persisted,” the more likely demand would remain below potential and “domestically generated inflationary pressures would be reduced.” So why should the BOE to step in and hike rates?

As part of its Brexit-linked guidance, the BOE said that in the event of a smooth Brexit and some recovery in global growth, the MPC maintains its guidance that it would be appropriate to carry out rate rises at a gradual pace and to a limited extent. However, In the event of a period of further entrenched uncertainty over the nature of the UK’s eventual trading relationship with the EU, domestically generated inflationary pressures could be reduced as demand growth remains below potential (with RanSquawk noting that the emphasis on entrenched uncertainty was a new addition to the text). The monetary policy committee also maintained that in the event of a no deal Brexit, the monetary policy response would not be automatic and could be in either direction.

“Brexit-related developments are making UK economic data more volatile, with GDP falling by 0.2% in 2019 Q2 and now expected to rise by 0.2% in Q3. The Committee judges that underlying growth has slowed, but remains slightly positive, and that a degree of excess supply appears to have opened up within companies. Brexit uncertainties have continued to weigh on business investment, although consumption growth has remained resilient, supported by continued growth in real household income. The weaker global backdrop is weighing on exports”, the MPC press release cautioned.

“Increased uncertainty about the nature of EU withdrawal meant that the economy could follow a wide range of paths over the coming years,” the minutes said. The BOE’s response to any outcome “would depend on the balance of the effects of Brexit on demand, supply and the sterling exchange rate.”

The minutes were the strongest clue yet as to how policy makers are bracing for extensions to the Brexit deadline. They reiterated that the response to no deal wouldn’t be automatic, and that if the departure goes smoothly a series of gradual and limited rate hikes would be needed over the next few years.

Some other observations:

• Domestic growth: The committee judges that underlying growth has slowed, but remains slightly positive. Q2 GDP growth fell 0.2% in Q2 (MPC forecast was for 0%), Q3 growth is now expected at 0.2%. (Prev. view of 0.3%). Increased government spending for 2020-21 could raise UK GDP by around 0.4% over the forecast horizon, all else equal  
• Global Growth: Since the previous meeting the US-China trade war has intensified, and the outlook for global growth has weakened  
• Inflation: CPI is expected to remain slightly below the 2% target in the near-term  
• Labour/wages: The Labour market appears to remain tight, but does not appear to be tightening further  
• Slack: Recently, entrenched Brexit uncertainties and slower global growth have led to the re-emergence of a margin of excess supply 

Prime Minister Boris Johnson says the U.K. will leave the European Union with or without a deal on a transition on Oct. 31, even though Parliament has legislated to force a delay if no deal is reached. The turmoil puts the BOE in limbo, with the fate of the economy hanging in the balance.

Overall, there was little new information, which explains the muted price action in markets.

Heading into the announcement, cable slumped to session lows, and held its losses after the announcement, trading 0.2% lower on the day at 1.2450, versus 1.2500 day high; Earlier in the session, cable was supported earlier amid broad dollar weakness; gilts steady, short sterling strip is unchanged.