UK reaction - BoE sits back to watch and wait on Brexit developments

David Page, Senior Economist at AXA Investment Managers, comments on the latest minutes from the Bank of England’s Monetary Policy Committee:-

  • BoE left policy unchanged (Bank Rate at 0.75%) by unanimous vote as widely expected.
  • Minutes note “main challenge” remains navigating Brexit and we consider policy on hold until the Committee sees what happens.
  • The Committee described its international forecasts as “broadly in line” with previous projections, noting emerging market volatility and trade disputes had increased downside risks.
  • Its assessment of the domestic economy was revised higher to 0.5% for Q3, but unchanged over the medium-term, still expected to deliver “excess demand”.
  • The minutes continued to discuss the prospect for an “ongoing tightening of monetary policy”.
  • We see the MPC as on hold until after Brexit. If the UK enters transition smoothly, as we on balance expect, we would expect the next policy tightening in May next year. However, other Brexit outcomes would likely delay future hikes (or lead to easier policy).

The Bank of England’s (BoE) Monetary Policy Committee (MPC) left policy unchanged today, with Bank Rate at 0.75%, APF at £435 billion and corporate bond stock at £10 billion. Its decision was by unanimous vote. Both the outcome and vote were widely expected in markets.

The announcement was also accompanied by the usual statement and minutes. Both suggested the MPC has little desire or expectation to alter monetary policy in the near term and that “August projections appeared to be broadly on track”. Rather, minutes acknowledge that “the main challenges” had continued to be to “assess the economic implications” of Brexit. In that vein the minutes recorded “greater uncertainty about future developments in the withdrawal process” and recorded a Reuters survey suggesting a perceived 25% chance of disorderly withdrawal.

  • The MPC reviewed global economic conditions to help judge its August forecasts. On balance, the minutes suggested that international economies had evolved “broadly in line with the Committee’s expectations”, but acknowledged that “downside risks to global growth” had “increased … to some degree”. The minutes noted:-
  • Emerging market “volatility”. Turkey and Argentina were specifically mentioned, although it was noted that the “UK’s direct trade linkages and banking sector exposures” to those economies were limited and that other emerging economies had “somewhat stronger fundamentals”. However, the Committee concluded that “previous crises had highlighted the risk of contagion”.
  • US “protectionist measures” were also recorded, that could “have a somewhat more negative impact on global growth”.
  • However, the MPC also revised higher its outlook for US Q3 GDP, stating that “early indicators … had been somewhat stronger than expected”.   

On the domestic economy, the MPC adjusted its Q3 GDP forecast higher to 0.5% (now in line with our own expectation) from 0.4%. It continued to describe a GDP outlook of, on average, around 1.75% over the coming three years, mildly in excess of potential growth of around 1.5%, which it saw delivering “a small margin of excess demand”. The minutes states that “the UK labour market had continued to tighten” and highlighted the acceleration in regular pay growth towards 3%, while noting survey evidence suggesting “some further rise in earnings growth”. However, the MPC acknowledged slightly more mixed news for broader inflation, with OfGem proposed energy price caps likely to weigh on the inflation outlook more than considered in August, but domestically generated inflation “projected to rise somewhat”.    

The MPC continued to point to August’s projections which stated “an ongoing tightening of monetary policy over the forecast period would be appropriate”. But how this is delivered will depend on the path of Brexit over the coming months. We believe that the Committee’s August hike cleared the decks and allows the Committee to watch and react to Brexit developments. On our central forecast that the UK achieves a deal with the EU and enters transition next year, we see GDP growth accelerating gently to 1.6% from an expected 1.4% this year, and expect the MPC to tighten monetary policy twice next year – beginning in May. However, with significant political risks at home and in Europe, we consider the risk of a “no deal” outcome greater than the 25% consensus. As such, the risk of a prolonged pause, or even a cut if the UK leaves the EU with no deal in March would unfold as the political uncertainty clears.

Financial markets posted little reaction to this widely-expected outcome. 2-year and 10-year yields remained at 0.80% and 1.49% respectively. Sterling eased marginally to the dollar and a little more to the euro (-0.1%) from pre-meeting levels. OIS markets suggest that markets see a better than evens chance of the next move only by June next year, consistent with our view that the next policy move will be after the 29 March 2019 Brexit date.  

Notes to Editors

All data sourced by AXA IM as at 13 September 2018.


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