Investment Clock insights

No change at the BoE (today at least)


Melanie Baker 

1 August 2019

As expected, the Bank of England kept policy unchanged at today’s meeting. They maintained their soft tightening bias - i.e. signalling that they would expect gradual and limited interest rate increases as appropriate, assuming a smooth Brexit transition. They did not move to a more explicitly neutral, let alone dovish, stance and the policy decision was unanimous. All in all – today’s decision was therefore a bit more ‘hawkish’ than some were probably expecting. 
However, there were plenty of references to the unusual situation the Bank of England (BoE) finds itself in regarding Brexit and the outlook for the economy.
Again, there was no clear messaging on what would happen to monetary policy in the event of no deal.  I continue to think that rate cuts are ultimately likely in a no deal outcome, not least because some policy members have indicated that they think the risks to the policy outlook are skewed in the direction of easing in that scenario. However, as Carney pointed out, the “Committee has not given to a collective view on that”.   The official line from the Monetary Policy Committee (MPC) is effectively ‘it’s complicated’: As before, “the appropriate path…would depend on the balance of the effects of Brexit on demand, supply and the exchange rate”.  Governor Carney in the press conference, in response to a question on this, did emphasise that they have said they will do what they can to support jobs and activity subject to the inflation target [my italics] and did flag that some individual members had given their views on the likely skew of any policy response. 
The BoE is NOT in the same position as the European Central Bank (ECB) and the US Federal Reserve (Fed): Carney drew some important contrasts with the situation facing the (more dovish) ECB and Fed. He pointed  out that, compared to the euro area, unit labour cost growth is stronger in the UK, unemployment is lower relative to the natural rate, and core inflation only just below target. With respect to US, he simply pointed out that the Fed had been on a long hiking cycle and they are adjusting from that. He also pointed out that “on top of that” the UK has an economy that could travel down multiple quite different paths, with inflation “bang on target”,  “domestic inflationary pressures are firming”…  “and the expressed government preference” is to pursue a deal. 

As expected, the Bank of England kept policy unchanged at today’s meeting. They maintained their soft tightening bias – i.e. signalling that they would expect gradual and limited interest rate increases as appropriate, assuming a smooth Brexit transition. They did not move to a more explicitly neutral, let alone dovish, stance and the policy decision was unanimous. All in all – today’s decision was therefore a bit more ‘hawkish’ than some were probably expecting. 

However, there were plenty of references to the unusual situation the Bank of England (BoE) finds itself in regarding Brexit and the outlook for the economy.

Again, there was no clear messaging on what would happen to monetary policy in the event of no deal.  I continue to think that rate cuts are ultimately likely in a no deal outcome, not least because some policy members have indicated that they think the risks to the policy outlook are skewed in the direction of easing in that scenario. However, as Carney pointed out, the “Committee has not given to a collective view on that”.   The official line from the Monetary Policy Committee (MPC) is effectively ‘it’s complicated’: As before, “the appropriate path…would depend on the balance of the effects of Brexit on demand, supply and the exchange rate”.  Governor Carney in the press conference, in response to a question on this, did emphasise that they have said they will do what they can to support jobs and activity subject to the inflation target [my italics] and did flag that some individual members had given their views on the likely skew of any policy response. 

The BoE is NOT in the same position as the European Central Bank (ECB) and the US Federal Reserve (Fed): Carney drew some important contrasts with the situation facing the (more dovish) ECB and Fed. He pointed out that, compared to the euro area, unit labour cost growth is stronger in the UK, unemployment is lower relative to the natural rate, and core inflation only just below target. With respect to US, he simply pointed out that the Fed had been on a long hiking cycle and they are adjusting from that. He also pointed out that “on top of that” the UK has an economy that could travel down multiple quite different paths, with inflation “bang on target”,  “domestic inflationary pressures are firming”…  “and the expressed government preference” is to pursue a deal. 

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