This was in line with markets’ expectations.
The minutes of the meeting highlighted that UK economic data has been volatile due to Brexit-related developments. The MPC added that the path of monetary policy could take either direction and will depend on the impact Brexit has on demand, supply and the exchange rate.
Government announcement could boost GDP
UK Gross Domestic Product (GDP) fell by 0.2 per cent in 2019 Q2, 0.2 per cent weaker than had been expected at the time of the August Inflation Report and now revised down to 0.2 per cent in Q3.
This might be explained by less than expected GDP growth from vehicle manufactures.
The minutes highlighted that government had announced a significant increase in spending which could raise GDP by 0.4 per cent over the next few years. The minutes added that Brexit uncertainty has weighed on business investment which has declined in five of the past six quarters.
CPI inflation has fallen to 1.7 per cent in August from 2.1 per cent in July. The MPC expects the measure to remain slightly below the two per cent target, near-term before rising close to target at the beginning of next year.
In addition, the minutes highlighted the longer uncertainties persisted the more inflation may weaken.
Monetary policy still in either direction…
The MPC highlighted that in a no-deal scenario, the exchange rate will probably fall which would lead to a rise in CPI inflation and a slowdown in GDP growth. In this case, the MPC said an interest rate decision would not be automatic and could be in either direction.
Market perception of a deal drives interest and foreign exchange rates upwards
The MPC said there had been increased volatility in asset prices. The market perception of a deal has increased recently which has driven the sterling exchange rate and UK forward rates upwards.
Labour market remains tight and consumer confidence is stable
The job market remains tight with unemployment at 3.8 per cent, in the three months to July, 0.1 per cent higher than expected in the August report. This was mainly driven by an increase in full time employment.
Additionally, annual pay growth increased to its highest rate in over a decade, according to the minutes.
Household consumption had strengthened following a growth of 0.5 per cent in Q1, rising by 0.5 per cent in Q2 which was stronger than expected.
Consumer confidence dipped in August.
House prices remained flat and mortgage approvals continue to edge up. Investment in housing had decreased by 0.8 per cent in Q2 and has been down in the last four of the past six quarters.
Market expectations
In light of these considerations, markets now forecast that the BoE base rate will be cut to 0.5 per cent in six months.
The three-month LIBOR is now expected to decrease to 0.5 per cent in one year and remain there for three years.
The current market prediction is that two-year rates will drop to 0.5 per cent in a year before rising to 0.75 per cent in two years.
Meanwhile, five-year swap rates are now expected to remain around 0.75 per cent for the next three years. The 10-year swap rates are still expected to stay at 0.75 per cent for the next three years.
* Using OIS Curve
**Based on the swap curve
