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Growth is slowing, Brexit is ripe with uncertainties, and the Bank of England (BoE) may lower its rate next year. Or not. The U.K. central bank offered a variation of its “either…or…” routine on Thursday while keeping, as expected, its key rate unchanged at 0.75%.
The only divergence from the well-honed exercise was the relative surprise provided by two members of the 9-strong monetary policy committee voting to lower rates immediately, arguing that threats of a downturn may be about to materialize.
Sterling GBPUSD, -0.2722% weakened on news of the committee’s split, down 0.3% against the dollar in mid-day trading. The U.K. currency has fallen 12% since the Brexit referendum in June, 2016.
But the real question to ask about the BoE’s monetary policy report may be whether it should be taken at its word, considering the fact that it doesn’t – and couldn’t – dwell on the major uncertainty of the moment: the December 12 general election. The election result may mark the beginning of many unforeseen scenarios. In any case, considering the electoral promises already made, billions of extra spending should seriously impact the gilt market, and the associated fiscal boost is bound to influence the BoE’s future decisions.
Sticking to its job, the BoE makes it clear that, if the current U.K. growth slowdown is due “partly” to the weakening global economy, it is above all caused “by increasingly entrenched Brexit-related uncertainties.”
However, the prospect of a deal, with the withdrawal agreement finally struck last month between the E.U. and the U.K. government, means that growth could pick up slightly next year, the BoE notes. If that happens, it “may need to lower interest rates” to insure inflation, currently under target, returns to the 2% goal.
But if the economy grows as the BoE expects then it may have to decide “a modest increase” of interest rates next year.
The BoE is bound in its forecast by the government’s stated policy, which aims at concluding a “deep free trade agreement” with the E.U. by the end of next year. There is little likelihood of that happening within that deadline, and uncertainty about the outcome of the future talks will hang over the U.K. economy and currency for months to come.
