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Bank of England to fall in line with central bank peers?

Friday, 8th November 2019 10:22 - by Shant

Today's announcement from the Bank of England was supposed to be a formality, in so much as the ongoing uncertainty from the failure to resolve the Brexit process leaves the MPC in limbo as much as it does the rest of the country.  It has been widely acknowledged that the long drawn out process which has been delayed time and again, is slowly eroding confidence in business, which in turn is holding back investment.  That the economy has held up as well as it has is a welcome development and one which up until now has maintained confidence at the Bank of England that slight and gradual tightening will be required as and when Brexit is finally concluded - one way or another.  

 

For much of the year, the uniform rhetoric from the MPC has maintained this stance - up until today.  While the base rate was held at 0.75%, the vote split, which was expected to return a 9-0 result, came out at 7-2 as MPC members Michael Saunders and Jonathan Haskel voted for an immediate cut of 25bps.  Their view was that with inflation below 2.0% - the Bank's target rate - and set to fall further due to the energy price cap to be introduced next year, there was little risk of any overheating from a near term cut in rates.  This would mirror their central bank peers around the world - including the Federal Reserve - who have responded to the downturn in the global economy as much as domestic metrics have warranted.

 

Indeed, external risks were ar key factor in their decision to go against the consensus, though this is hard to ignore with the Fed doing likewise despite extremely low unemployment in the US - something which the UK is also enjoying at the moment.  Both economies are benefiting from unemployment rates below 4.0% for now.  However, this is perhaps on the turn - in the UK - according to Messrs Saunders and Haskel.  For now, the dominant service sector is performing well as evidenced by the ongoing expansion reflected in the PMI data.  The indices are lower though, and under new trading arrangements with the EU, divergent regulation could hit services sectors across the country, though at this stage, this is impossible to quantify to any significant degree.  

 

Once again, we come up against the uncertainty which Brexit has thrown up for the last 3 and a half years.  The prospect of a deal being agreed with the EU is clearly cause for some degree of optimism, but as the EU's chief negotiator reminded all and sundry this week, there is a long way to go before businesses on both sides of the divide can rest easy.  The MPC's assumption that a Canada style free trade agreement between the UK and EU would still raise administrative costs for businesses with close ties to Europe, so there will be a price to pay come what may.  

 

Even so, the Bank of England governor remains confident that there will be an economic 'pick up' if the incoming government can get a Brexit deal over the line - assuming of course, that this is what they will pursue once in power.  As the polls currently show, the Conservative party remains in a comfortable lead over Labour, but the past few years have clearly shown us that polls are not to be relied upon.  There is still the prospect of a hung parliament come mid-December.  

 

If the Tories to come back to government and pick up where they left off (or indeed any government), then the MPC expects annualised growth to rise from 1% to 2% by the end of 2022.  The third quarter of this year outperformed on expectations by recording a 0.4% growth rate quarter on quarter, though Q4 is expected to fall in line with forecasts of 0.2% - which were also the median call for Q3 by the way.  The MPC is, however, counting on a big 'if'.  Given the persistent delay and logjam in parliament, it is perhaps not surprising that some policymakers are giving way to a more accommodative stance.  They are, after all, seeing what many of the rest of the major central banks are seeing on a global perspective.

 

 

The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.

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