The Bank of England very rarely causes a stir in financial markets. Given the looming proximity of the next seemingly crucial Brexit deadline and the uncertainty over a deal or no-deal, it should come as no surprise that the MPC has done very little different today. But is that it? We look at the impact of today’s decision.
No change to rates as expected, whilst the MPC voting committee was unanimous at 0-0-9. A look at the main economic projections makes for intriguing reading. They reflect a Bank hamstrung by Brexit uncertainty. Inflation and growth remains muted for now, but both are expected to pick up. However, the rate hiking bias of the coming years is no longer there in the forward market interest rates, with a 25 basis point cut priced for next year. The question is, without Brexit, would this still be the case?
Inflation
The projection has been mildly downwardly revised to +1.7% (from +1.8%), before picking up again in subsequent years. Interestingly it is expected to pick significantly above the 2% target in 2021 and 2022. The impact of sterling weakness would be a factor here, but this is a reflection of a hawkish bias still from the Bank of England. Core inflation is expected to be little changed from its +1.8% of June for the rest of the year. Effectively, if this were to be the case that Brexit uncertainties were not in play, such a projection would be ripe for rate hikes.
Growth
Growth is expected to pick up after a dip in 2019 and remain “robust over the forecast period”. However, another takeaway is the wide levels of variance within the growth fan below. In short, the projection is massively dependent on variables, ie. Brexit.
Unemployment
The rate is expected to continue to track lower in Q3, falling back to 3.7% before stabilising around 4.0% next year.. Added to the continued positive aspect of wage growth this shows a tight labour market. The BoE reflects this in its Phillips Curve analysis. Wage growth is expected to moderate but still remain decent at an average of +3.5% throughout the rest of 2019. Given the inflation rate is expected to be in the low 2% region, real wages are likely to be supportive for the UK consumer.
Brexit
Brexit is clearly a massive uncertainty, as from the policy statement:
As a result, this means that the projections cannot be based upon a no deal Brexit. However, in his press conference, Mark Carney has been keen to point out the issues the BoE faces with the uncertainties of Brexit impacting on forecasts. In short, in the event of a no deal Brexit, they have not got a clue – and to be honest, they are not alone there.
Business investment continues to track negative and continues to worsen in the eyes of the Bank of England. Add in Household Consumption growth which remains subdued. This is an economy with the handbrake firmly applied.
Market Impact
Has been limited, but that is not to be unexpected.
Sterling took a few moments to consider the impact, before picking up. In the first hour, Cable was around 20/25 pips higher, but has since just started to pare these gains. Similarly, Gilt yields picked up slightly initially. Both the 10 year and 2 year yields picked up around +2 bps, but then that was unwound slightly.
As for the outlook for Cable, it does very little to change the narrative of sterling weakness. There is a basis of support around $1.2100 but if this is breached on a closing basis, then the way is open for the crucial January 2017 low at $1.1980. Brexit remains the over-arching concern for the market and until there is clarity of how Boris Johnson will proceed, this will remain the case.
All in all, the market has taken this as a very slightly hawkish meeting from the Bank of England, but is also realistic to know that Brexit remains the crucial swing factor for the outlook of monetary policy and sterling.
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