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Economics

BoE seeks Brexit bounce as it resists rate cut


Azad Zangana

Azad Zangana

Senior European Economist and Strategist

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Mark Carney held his final press conference as Governor of the Bank of England (BoE) today as the monetary policy committee (MPC) voted seven-to-two to leave interest rates on hold.

Markets had anticipated that the BoE would deliver a cut after several MPC members delivered dovish speeches hinting at the possibility of an imminent loosening in policy.

As a result of the Bank’s inaction, the pound is up about 0.6% against the US dollar and about 0.4% against the euro at the time of writing. Meanwhile, gilt yields rose (prices fell), while UK equities also fell in reaction to the decision.

Lifting cloud of uncertainty

Carney explained that forward-looking indicators had started to recover following the result of the general election, which in turn broke the political deadlock that had caused much of the Brexit-related uncertainty.

With political uncertainty abating, private business surveys are starting to signal a rebound in business confidence, which should translate to a recovery in business investment and GDP growth.

However, Carney warned that if the positive signals do not result in the expected improvement in growth, then policy loosening may be warranted.

Downgrade to GDP forecasts

In terms of its forecast, the BoE downgraded its GDP forecast from 1.25% to 0.75% for 2020 and from 1.75% to 1.5% for 2021. However, it left its inflation forecast unchanged at 1.5% for 2020 and 2% for 2021.

It did, however, downgrade its long-run assessment of potential growth, suggesting that the economy would generate more inflation with less growth going forward – a worse trade-off between the two.

The MPC also dropped the forward guidance of “gradual and limited” rate rises. Taken together, this was initially interpreted as a signal of more rapid increases in interest rates. However, during the press conference, Carney clarified that the previous guidance suggested multiple rate rises, which may not be the case going forward.

Overall, the latest quarterly assessment from the BoE is balanced. The committee is looking at the improving forward-looking indicators following the abatement of political risk, while being mindful of recent weaker data and inflation being below its central target.

Where next for interest rates?

We continue to forecast UK interest rates to remain on hold for all of 2020, with a possible single 0.25% hike in 2021.