BOE Preview: On The Sidelines Once Again

The Bank of England will be holding its monetary policy meeting today. Officials at the central bank will, no doubt, be leaving interest rates steady.

The UK’s interest rates stand at 0.75%, for the most part, this year.

So far there is no evidence of pressure on the central bank. This comes as inflation has been weaker and falling below the BoE’s 2.0% inflation target rate. But the UK’s economic outlook remains weak.

The BoE is one of the few central banks which has not cut rates unlike the Federal Reserve or the ECB.

In its previous outlook, officials gave a forecast of 1.3% GDP growth for both this year and next year. This is unlikely to change at this meeting.  The central bank continues to maintain that interest rates could rise in the longer term.

The central bank has repeatedly stuck to this tone as it expects that growth will start to kick in. But complicating the central bank’s monetary policy is the Brexit uncertainty.

The UK was supposed to leave the EU on the 31^st of October. But this did not happen. In fact, the UK now sought another extension that sees the Brexit deadline pushed to January 2020.

Despite the rates staying steady, some officials remain wary that the central bank isn’t doing much. The current Brexit uncertainty has hit business investment very sharply. Therefore, some members of the BoE’s monetary policy committee see the need for a rate cut.

They argue that a rate cut will help to boost sentiment. But the rate cut could be unnecessary as the effects could be limited to a certain extent alone. As long as the Brexit uncertainty continues, investment will continue to remain weak.

UK’s Snap Elections to Keep BoE on Hold

The central bank also has to contemplate the December elections as well. After UK lawmakers failed to pass the Brexit deal within the October 31^st deadline, PM Johnson called for a snap election.

The elections are seen by some as the UK’s ability to hold a second referendum.

The Labor party led by Jeremy Corbyn maintains that they will seek a new Brexit deal, which includes putting forth a second referendum. Whatever the case, the uncertainty will continue to take a toll.

The UK economy has been resilient. After initially contracting in August, the GDP has been put back on track. But officials from the UK Office for National Statistics say that they need to assess more information.

Therefore, the likelihood that the UK economy will be resilient to Brexit uncertainty is still questionable. For the moment, the UK’s extra public spending could add up to 0.4% to the GDP growth.

This reduces the risk of a recession at least for the short term.

The third-quarter GDP reports suggest that growth could rise above 0.3%, indicating that the temporary slip in growth was only transitory.

In January, the current BoE Governor, Mark Carney will also finish his term at the helm. The UK government was supposed to announce a new BoE chief last week, but it postponed the decision.

Thus, amid the uncertainty and chaos, the best possible solution for the BoE would be to remain on the sidelines. A lack of pressures on the central bank also makes it easy for officials to stay mum until there is some clarity to the near term horizon.