Bank of England maintains Bank Rate at 0.75 pct, likely to be on hold in coming year

The Bank of England kept the Bank Rate on hold at 0.75 percent during today’s meeting. Nevertheless, two external members, Haske and Saunders, voted for a rate cut. Their arguments were that the economy has been slightly weaker than expected and “there was a modest but rising amount of spare capacity. Core inflation was subdued. Employment growth was slowing and seemed likely to weaken further given trends in vacancies and firms’ hiring intentions”. They also argued that there continues to be downside risks to the MPC’s forecasts from a softer global outlook and Brexit uncertainties.

The Monetary Policy Committee, in the minutes, stated that the monetary policy might respond in either direction to changes in the outlook of the economy to guarantee a “sustainable return of inflation to the 2 percent target”.

The Bank of England mainly focused on the downside risks in the short term. The central bank stated that the MPC might keep a close eye on the responses of firms and consumers to developments of Brexit and also at the prospects of a rebound global growth. The minutes stated that if global growth failed to stabilise or if Brexit uncertainties remained entrenched, monetary policy might need to reinforce the expected recovery in UK GDP growth and inflation.”

Meanwhile, the BoE continues to argue for a moderate policy tightening in the longer run, provided that the downside risks do not materialize. The minutes stated that if these risks did not materialize and the economy rebounds on par with the MPC’s latest forecasts, “some modest tightening of policy, at a gradual pace and to a limited extent, might be needed to maintain inflation sustainably at the target.”

According to a DNB Market Research report, the Bank of England is expected to keep the Bank Rate on hold in the coming year.

“First we regard the reduced risk of a no-deal Brexit as somewhat positive short term. Furthermore, we believe a soft Brexit to be the most likely outcome, even if there is a risk of a no-deal Brexit in January 2021. A the uncertainty regarding the future relationship with EU remains, the economic development next year will likely not be strong enough for the BoE to hike the Bank rate”, added DNB Markets.