19 September 2019
Unanimous vote to keep rates on hold
The Bank of England cited many of the observations that other central banks have communicated in the past week or so: downside risks to growth both globally and domestically and still subdued inflation. However, unlike the European Central Bank and the US Federal Reserve, they remain a notable absentee from the global rate-cutting cycle seen this year as they chose to keep rates on hold for the 13th consecutive month.
In addition to the unanimous vote to leave the base rate at 0.75 per cent, the Monetary Policy Committee (MPC) left the Bank’s asset purchase program unchanged. The Bank also revised down its growth forecasts for the UK economy in the third quarter of 2019, from 0.3 per cent to 0.2 per cent.
The job of the MPC has unquestionably been made more difficult by the uncertainty caused by the Brexit shenanigans over the last year or so, and one can make the case that, until there is clarity on the matter, the MPC are best served by holding fire.
The case for a cut
However, I would argue that given anaemic UK growth is already trending below the Bank’s own projections, and with little clarity on the timing of a Brexit resolution (soft or hard) or even a general election, the case for an ‘insurance cut’ has become even stronger. Given that the Bank’s own statement accompanying the rate decision noted that Brexit uncertainty had recently caused a degree of slack to open up in the economy, reducing inflationary pressure, the unanimous vote of all nine members to leave rates on hold is all the more surprising.
This was the last chance the BoE had to act until after the current Brexit deadline of 31 October, meaning in theory the MPC’s next meeting will be held when there is more clarity on the circumstances of the UK’s departure from Europe. In practice, any sort of certainty on Brexit, deal or no deal, is a long way off and the damage this is already doing to UK investment is widely reported. The tone of the MPC remains too ambiguous with regard to the path of interest rates and I expect the data to continue to disappoint. When looking at the ‘known knowns’, I think the case for a rate cut is compelling and I expect the MPC to draw the same conclusion by the end of the year.
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