BoE September: No Changes Expected

The Bank of England will be holding its monetary policy meeting today. This will be the last monetary policy meeting ahead of the October 31 Brexit deadline.

Investors expect the Bank of England MPCs to leave monetary policy unchanged. As a result, the BoE’s interest rates will be steady at 0.75%, while the central bank’s asset purchase program will remain at 435 billion GBP. The status quo will be maintained against the backdrop of both domestic and global headwinds.

Domestically, the Brexit uncertainty remains a big issue for the central bank. Meanwhile, external factors such as slowing global growth and the trade dispute between the US and China continue to dampen the outlook.

At its previous monetary policy meeting, the BoE officials cut the growth forecast for the UK for 2019 and for the next year. It also warned of the risks that the UK could slip into a recession.

The central bank has maintained the view that if the UK leaves the EU with a deal, then it would be appropriate to raise interest rates. However, with no deal in sight and the prospects of a no-deal Brexit rising, the BoE will have no other option but to stand pat on policy.

Some economists saw the previous central bank meeting as more hawkish than usual. However, the narrative could change amid the recent developments in the UK economy.

UK Economy Recap Since August BoE Meeting

The Bank of England last met in early August. Since then, economic reports from the UK gave a mixed picture. The biggest headline-grabbing report was the GDP.

The UK economy contracted 0.2% in July which raised concerns of a recession. However, that changed after the GDP report for August showed a reversal. The economy managed to recover, rising 0.3% in August.

But the statistics agency ONS said that investors should not read too much into one month’s report. It also warned that growth was stagnating in the long-term trends.

The latest inflation figures do not show any signs of price pressures. But the inflation rate remains above the BoE’s 2% inflation target rate. The UK’s annual inflation grew at a pace of 2.1% in August.

This was slightly above the expectations and modestly up from 2.0% from the previous month. The core inflation rate was, however, running below 2.0%. In August, the core inflation rate was at 1.9%.

While the GDP and inflation give a mixed picture, the labor market continues to remain strong.

The UK’s latest job figures show that the average earnings index grew 3.7% in the three months to July. This was up from a revised 3.5% headline print in the month before.

Currently, wages outperform inflation, putting more money in the hands of consumers.

As a result, the latest retail sales figures nudged higher. Retail sales grew 0.2% on the month, following a downward revised 0.9% in the month before.

How Long Will the BoE Stay on the Sidelines?

The Bank of England’s stance on monetary policy stands in contrast to other central banks. The ECB and the Fed, alongside other central banks such as the RBA and the RBNZ, have moved to an easing bias.

The Brexit uncertainty has intensified more in the past few weeks. This gives a downside risk to growth. Even if the UK leaves with a Brexit deal in hand, the UK’s economy will take time to recover.

As a result, growth could remain weak and will likely spill into the next year. Demand, exports, and investment remain week and will take time to recover. As a result, the central bank in the UK is unlikely to raise rates at least well into the end of next year.

Depending on the outcome of the Brexit saga, the Bank of England has a higher probability of cutting rates rather than raising rates. The meeting minutes will, therefore, be crucial as investors assess the forward guidance from the central bank.