Bank continues its “wait and see” stance
Today’s decision does not come as too much of a surprise – predominantly because we are still waiting for clarity on the terms of the UK’s withdrawal from the EU. Had an agreement been signed sealed and delivered at the October EU summit, some MPC members may have been tempted to raise rates given wage growth is finally picking up and the economy ticked along at a stable pace in August. Throw in the fact that inflation is still above target, and the expansionary fiscal measures the Chancellor announced on Monday, and we may have seen a few more dissenters.
Alas, we are still in the dark. As a result the Bank’s outlook is little changed from three months ago.
They still expect households and consumers to be resilient, a result of a tight labour market and emerging wage pressures, while net trade is also expected to contribute to growth.
Conversely Brexit induced uncertainty – particularly surrounding business investment - was highlighted both in the Bank’s inflation report and in the governor’s press conference as being weaker than originally anticipated. A finding that backs up our recent Investment Monitor.
“Business investment had been weaker than previously anticipated, and the recent intensification of Brexit uncertainty appeared likely to keep business spending subdued in the near term”
No real change here then...
Plenty of Brexit warnings however
The Bank are maintaining their central assumption of a smooth transition out of the EU – one which will see investment and demand pick up in the coming year. Nevertheless, there were plenty of warnings of the impacts of a disorderly exit – a topic that dominated the press conference.
Indeed, the Governor said a no-deal Brexit would deliver “an immediate and material hit” to the economy impacting demand, supply and the value of pound. While the Governor was at pains to state this was the more unlikely scenario, the following line from the Inflation Report illustrates it is on their radar, and the Bank will intervene as necessary.
“The economic outlook will depend significantly on the nature of EU withdrawal, in particular the form of new trading arrangements, the smoothness of the transition to them and the responses of households, businesses and financial markets. The MPC judges that the monetary policy response to Brexit, whatever form it takes, will not be automatic and could be in either direction.”
For now, there has been little change in the Bank, as well as our outlook for the UK economy. Clearly the outcome of the EU negotiations will have a great bearing on the future path of the economy, and for now any discussions on monetary policy will be put on pause until the clouds of uncertainty are lifted. The next Super Thursday in February will be one to watch closely.