BoE rate decision
Vote hike: 0
- Saunders and Haskell voted for cut.
- Saunders and Haskell say stimulus needed now as data suggests labour market turning and sees downside risks from Global economy
- UK economy likely to be 1% smaller by Q4 2022 than expected in August forecasts
- Saunders and Haskell wanted to cut rates to 0.50% from 0.75%
- Inflation in one years time seen at 1.51% (Aug 1.90%), two years time (2.03% Aug 2.23%) and three years time 2.25% (Aug 2.37%)
- Market rates imply more BoE loosening than in Aug point to bank rate at 0.5% in 2022
- BoE MP report shows unemployment rate at 3.8% in two years time (Aug 3.7%)
- Risks to UK GDO growth skewed to the downside in 2nd and 3rd years of forecast horizon
- BoE forecast sees inflation bottoming oil at 1.2% in Q2 and Q3 2020 due to lower oil prices, regulatory caps on domestic electricity and water bills
- Almost all UK firms surveyed by the BoE said that they are ‘fully ready’ or ‘as ready as they can be’ for Brexit
Full BoE rate text here
The Committee voted unanimously to maintain the stock of sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, at £10 billion. The Committee also voted unanimously to maintain the stock of UK government bond purchases, financed by the issuance of central bank reserves, at £435 billion.
The Committee’s new projections for activity and inflation are set out in the accompanying November Monetary Policy Report. They are now based on the assumption of an orderly transition to a deep free trade agreement between the United Kingdom and the European Union.
Looking through Brexit-related volatility, underlying UK GDP growth has slowed materially this year and a small margin of excess supply has opened up. That slowdown reflects weaker global growth, driven by trade protectionism, and the domestic impact of Brexit-related uncertainties.
In October, the UK and EU agreed a Withdrawal Agreement and Political Declaration as well as a flexible extension of Article 50. As a consequence, the perceived likelihood of a no-deal Brexit has fallen markedly and the sterling exchange rate has appreciated. These agreements are expected to remove some of the uncertainty facing businesses and households, and the MPC projects that UK GDP growth will pick up during 2020. This will be further supported by easier UK fiscal policy and a modest recovery in global growth. Over the remainder of the forecast period, demand growth is expected to outstrip the subdued pace of supply growth, which is restrained to some extent by the adjustment to new trading arrangements with the EU.
Inflationary pressures are projected to lessen in the near term. CPI inflation remained at 1.7% in September and is expected to decline to around 1¼% by the spring, owing to the temporary effect of falls in regulated energy and water prices. While unit labour costs have been growing at rates above those consistent with meeting the inflation target and core services CPI inflation has begun to increase somewhat, employment growth has slowed and pay growth is likely to fall back in the near term. In the second half of the MPC’s forecast period, however, as a significant margin of excess demand emerges, domestic inflationary pressures are expected to build. Conditioned on current market yields, CPI inflation is projected to rise to slightly above 2% towards the end of the forecast period.
Monetary policy could respond in either direction to changes in the economic outlook in order to ensure a sustainable return of inflation to the 2% target. The Committee will, among other factors, monitor closely the responses of companies and households to Brexit developments as well as the prospects for a recovery in global growth. If global growth fails to stabilise or if Brexit uncertainties remain entrenched, monetary policy may need to reinforce the expected recovery in UK GDP growth and inflation. Further ahead, provided these risks do not materialise and the economy recovers broadly in line with the MPC’s latest projections, some modest tightening of policy, at a gradual pace and to a limited extent, may be needed to maintain inflation sustainably at the target.
The MPC judges at this meeting that the existing stance of monetary policy is appropriate.