The Bank of England decided to keep monetary policy unchanged on a unanimous decision at 0.75%. Analysts at Rabobank point out that while it sends a tough message with regards to a no-deal Brexit, the Monetary Policy Committee has retained the view that the government is ultimately looking for a deal. They expect the UK will eventually leave the European Union with some sort of deal in place, their forecast a steady bank rate for this year and next.
Key Quotes:
“The Bank of England MPC kept rates unchanged at 0.75%. There were no changes to the asset purchase facility either. Crucially, the forward guidance was broadly left untouched.”
“The guidance of a slow rise in rates is coming under increased pressure. This is primarily due to the progressively binary future path of the UK economy.”
“The MPC didn’t want to risk being accused of political interference by assuming anything other than the stated government policy. While this is the safest course of action, it doesn’t give the market a whole lot of information, and it’s fair to say that these forecasts have a shelf life of just 3 months.”
“The sharp divergence between the MPC’s forward guidance (which is based on a smooth Brexit) and actual market prices (which account for no-deal risks) created some significant inconsistencies in the Inflation Report projections. This is because the MPC directly plugs a market-implied path of forward Bank rates into their economic models, which still have a smooth Brexit as the central scenario.”
“Today he (Carney) maintained the view that the MPC’s response wouldn’t be automatic and that it will depend on demand, on supply and where the exchange rate is heading. This suggests that the MPC -for now, at least- doesn’t want to add fuel to the recent sell-off in sterling. That’s all understandable, but when push comes to shove, there is a clear risk that the Bank of England will cut interest rates to mitigate the economic fall-out of a no-deal Brexit.”
Share
