Monetary Policy & Inflation | UK
Many had expected Mark Carney to cut rates as his parting gift as Bank of England Governor, but in the end the MPC kept rates unchanged at 0.75%. The committee concluded the environment was “good enough” though they removed the words “limited and gradual” in reference to the pace of future rate hikes. The pound strengthened on the decision, and UK yields rose.
The March Budget and raft of economic data due before the next MPC decision on March 26 will give new Governor Andrew Bailey a lot to consider.
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Many had expected Mark Carney to cut rates as his parting gift as Bank of England Governor, but in the end the MPC kept rates unchanged at 0.75%. The committee concluded the environment was “good enough” though they removed the words “limited and gradual” in reference to the pace of future rate hikes. The pound strengthened on the decision, and UK yields rose.
The March Budget and raft of economic data due before the next MPC decision on March 26 will give new Governor Andrew Bailey a lot to consider.
Post-election Bounce Convinces the MPC
Survey data won the day on Thursday. The post-election bounce in business sentiment, consumer confidence and housing indicators were enough for the MPC to determine the current monetary policy stance was appropriate. Ongoing resilience in the labour market, despite some easing back in wage growth, also helped. As did the slightly improved global backdrop of reduced US-China trade tensions and easier monetary conditions thanks to last year’s rate cuts from major central banks. This was enough for the MPC to adopt a wait-and-see approach. Rather than the insurance cut that some had deemed the UK needed.
The current three-year low in inflation, dismal consumer spending data in the run-up to Christmas and the lower than expected -0.3% MoM reading for November GDP all failed to convince the MPC of an imminent need to cut rates. Nevertheless, Carney acknowledged that the economic recovery was not yet assured. Prolonged Brexit uncertainty – and the resulting weakness in business investment – has had a cumulative effect on the economy and diverted resources into contingency planning rather than future expansion.
Thursday’s MPC meeting also brought to the fore the gap between Chancellor Sajid Javid’s hopes for the UK economy and the Bank’s own estimates of potential growth. Javid said recently a return to pre-crisis growth of close to 3% was plausible. But the Bank’s estimates of supply potential are closer to 1%. Even with a smooth transition to a new trading relationship with the EU (which is far from assured) a significant uptick in productivity or labour supply seems decidedly unlikely.
A Rate Cut Could Still on the Table
The MPC’s baseline is for a pickup in price pressures and for the bounce in soft data to translate into real activity. Should this fail to materialise a rate cut could remain on the table. Bailey takes the helm as Bank of England Governor on March 16. By then he will have a raft of economic data to consider as well as the March 22 budget, the first from Chancellor Javid and one that is expected to be expansionary.
But even should Bailey turn out to be a dove it would take two more MPC members to push through a rate cut. Thursday’s decision was another 7-2 split, unchanged from the two previous meetings, with Michael Saunders and Jonathan Haskel, voting for a 25bps cut. Both Gertjan Vlieghe and Silvana Tenreyro had recently commented they would vote for a rate cut in the coming months if data did not improve. So even though they did not do so on Thursday, we expect that should data disappoint, the momentum for a rate cut will build.
A Hawkish Tilt in Forward Guidance
Thursday’s statement modified the forward guidance on rates, removing the earlier reference to future hikes coming at a “gradual pace and to a limited extent”. The market took that as a hawkish tilt with the pound strengthening past 1.31 against the USD and yields rose slightly. But as the statement retained the possibility of rate cuts if the data fail to improve, as well as repeating the words “modest tightening” in reference to future hikes we do not see it as overly hawkish. And with the enormous uncertainty ahead as the UK negotiates a new relationship with the EU the need for rate cuts in the UK seems quite some way off.
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