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Bank of England’s rate hold sends a cautious message – Alex Maddox

by: Alex Maddox, capital markets director, Kensington
  • 11/11/2019
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Bank of England’s rate hold sends a cautious message – Alex Maddox
Last week the Bank of England’s Monetary Policy Committee (MPC) voted by a majority of seven to two to keep the base rate unchanged at 0.75 per cent, in line with markets’ expectations.


For the first time since June 2018 the vote was split as two members of the MPC voted for a 25bps cut in interest rates, citing downside risks to the bank’s growth projections from weaker global growth and more persistent Brexit uncertainties affecting corporate and household spending.

Although the bank stated that monetary policy could respond in either direction, with a rate increase or rate cut depending on changes in the economic outlook, the market saw a conservative message reflected in the dissenting votes of MPC members.


Updated forecasts for GDP growth and inflation

The bank now expects UK GDP growth to pick up from one per cent in 2019 to 1.6 per cent in 2020, supported by dissipation of Brexit-related uncertainties, easier fiscal policy and gradual recovery in global growth.

However, as compared to its August projection, growth forecasts for 2021 and 2022 are lowered to 1.8 per cent compared to 2.2 per cent in 2021, and 2.1 per cent compared to 2.3 per cent in 2022.

The changes in forecasts reflect a weaker global growth and prevailing Brexit uncertainties. Overall, uncertainties over global trade talks and the ultimate format of Brexit should continue to weigh on domestic consumption and investment.

Inflation is projected to edge lower in the near term, reflecting temporary effects of lower regulated energy and utilities prices. However, the Consumer Prices Index (CPI) is projected to rise to two per cent in 2021 and 2.2 per cent in 2022, as rising excess demand should lead to stronger domestic inflationary pressures.

Unemployment is expected to remain low and wage growth is projected to be relatively strong, averaging 3.75 per cent for the period of Q4 2019 to Q2 2020.


Asset purchases maintained

The MPC voted unanimously to maintain the stock of sterling non-financial investment-grade corporate bond purchases, at £10bn and the stock of UK government bond purchases at £435bn.

The MPC reiterated that monetary policy could take either direction, either a rate increase or a rate cut, in order to restore the inflation to the two per cent target.

However, the market thinks the central bank is likely to be more supportive of the economy amid weak global growth and ongoing Brexit uncertainties with a 0.25 per cent cut in 2020 if global markets fails to stabilise or if Brexit uncertainties continue.

The market currently forecasts a rate cut in H1 2020. The rate market remained however unchanged, with the three-month London Interbank Offered Rate (Libor) two-year swap rate, three-year swap rate, and five-year swap rates expected to remain at 75 bps for the next three years and the market continues to expect a flat rate curve.

The ten-year swap rates are expected to stay at one per cent for the next three years.







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