BOE leaves bank rate unchanged at 0.75%; votes 0-0-9

Author: Justin Low | Category: Central Banks

BOE announces its latest monetary policy decision - 19 September 2019


  • Prior 0.75%
  • Official bank rate votes 0-0-9 vs 0-0-9 expected
  • Asset purchase target £435 billion
  • Corporate bond target £10 billion
  • If Brexit uncertainty persists, inflation likely to become weaker
  • Inflation will stay under 2% target for the rest of 2019 based on staff forecasts
  • Outlook for global growth has weakened due to US-China trade war
  • Entrenched Brexit uncertainties have led to reemergence of spare capacity
  • Labour market appears to remain tight, too early to judge that it is starting to loosen
  • Sees Q3 growth at 0.2% (previously 0.3%)
  • UK underlying growth has slowed but remains positive
  • Reiterates that reaction to no-deal Brexit would not be automatic
  • Reiterates assumption of smooth Brexit scenario
  • And that would mean gradual and limited rate hikes
Essentially, this is about as non-event as you could get from the BOE. There is no significant change to the statement at first glance apart from some downside risks being highlighted on the inflation front. All the Brexit risk responses remain unchanged.

There is no overbearing dovish tilt in the language and the 0-0-9 votes suggest that policymakers aren't exactly looking towards rate cuts just yet at this point in time.

Cable holds steady around 1.2460, just off lows of 1.2445 as there is little in the report here to suggest any sudden shift to rate cuts towards the end of the year. That said, there is little reason to believe the opposite either as long as Brexit uncertainty continues to linger.

The full BOE statement:

"The Bank of England's Monetary Policy Committee (MPC) sets monetary policy to meet the 2% inflation target, and in a way that helps to sustain growth and employment. At its meeting ending on 18 September 2019, the MPC voted unanimously to maintain Bank Rate at 0.75%. The Committee voted unanimously to maintain the stock of sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, at £10 billion. The Committee also voted unanimously to maintain the stock of UK government bond purchases, financed by the issuance of central bank reserves, at £435 billion.

Since the MPC's previous meeting, the trade war between the United States and China has intensified, and the outlook for global growth has weakened.  Monetary policy has been loosened in many major economies. Shifting expectations about the potential timing and nature of Brexit have continued to generate heightened volatility in UK asset prices, in particular the sterling exchange rate has risen by over 3½%.

Brexit-related developments are making UK economic data more volatile, with GDP falling by 0.2% in 2019 Q2 and now expected to rise by 0.2% in Q3. The Committee judges that underlying growth has slowed, but remains slightly positive, and that a degree of excess supply appears to have opened up within companies. Brexit uncertainties have continued to weigh on business investment, although consumption growth has remained resilient, supported by continued growth in real household income. The weaker global backdrop is weighing on exports. The Government has announced a significant increase in departmental spending for 2020-21, which could raise GDP by around 0.4% over the MPC's forecast period, all else equal.

CPI inflation fell to 1.7% in August, from 2.1% in July, and is expected to remain slightly below the 2% target in the near term. The labour market appears to remain tight, with the unemployment rate having been just under 4% since the beginning of this year. Annual pay growth has strengthened further to the highest rate in over a decade. Unit wage cost growth has also risen, to a level above that consistent with meeting the inflation target in the medium term. The labour market does not appear to be tightening further, however, with official and survey measures of employment growth softening.

For most of the period following the EU referendum, the degree of slack in the UK economy has been falling and global growth has been relatively strong.  Recently, however, entrenched Brexit uncertainties and slower global growth have led to the re-emergence of a margin of excess supply. Increased uncertainty about the nature of EU withdrawal means that the economy could follow a wide range of paths over coming years. The appropriate response of monetary policy will depend on the balance of the effects of Brexit on demand, supply and the sterling exchange rate.

It is possible that political events could lead to a further period of entrenched uncertainty about the nature of, and the transition to, the United Kingdom's eventual future trading relationship with the European Union. The longer those uncertainties persist, particularly in an environment of weaker global growth, the more likely it is that demand growth will remain below potential, increasing excess supply. In such an eventuality, domestically generated inflationary pressures would be reduced.
In the event of a no-deal Brexit, the exchange rate would probably fall, CPI inflation rise and GDP growth slow. The Committee's interest rate decisions would need to balance the upward pressure on inflation, from the likely fall in sterling and any reduction in supply capacity, with the downward pressure from any reduction in demand. In this eventuality, the monetary policy response would not be automatic and could be in either direction.

In the event of greater clarity that the economy is on a path to a smooth Brexit, and assuming some recovery in global growth, a significant margin of excess demand is likely to build in the medium term. Were that to occur, the Committee judges that increases in interest rates, at a gradual pace and to a limited extent, would be appropriate to return inflation sustainably to the 2% target.

In all circumstances, the Committee will set monetary policy appropriately to achieve the 2% inflation target. The MPC judges at this meeting that the existing stance of monetary policy is appropriate."

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