At its meeting ending on 20 March, the Monetary Policy Committee (MPC) of the Bank of England (BoE) voted unanimously to keep the Bank Rate unchanged at 0.75%. The Bank was also in full agreement to maintain the stock of investment-grade corporate bond purchases at GBP 10 billion and to maintain the total stock of UK government bond purchases at GBP 435 billion, financed by the issuance of Central Bank reserves. All decisions were in line with market expectations.
The BoE remains in wait-and-see mode given the lack of clarity over the outcome of Brexit. Moreover, domestic price pressures are not excessive—inflation was marginally below the 2.0% target in February—while economic activity is mild and global economic momentum has eased, meaning the Bank was under little pressure to continue its tightening cycle.
In its communiqué, the BoE reiterated its guidance that monetary policy will likely tighten going forward, albeit gradually and to a limited extent. The Bank also reemphasized the impact Brexit could have on monetary policy decisions and left the door open to monetary easing in the case of a disorderly withdrawal.
According to economists at Nomura: “assuming Brexit ends up with some kind of deal and transition period then we think the BoE would be faced with improving sentiment, investment picking up and generally stronger economic growth”, leading to a tighter stance.
Daniel Vernazza, economist at UniCredit, takes an opposing view: “The BoE is now out of sync, with the Fed no longer expecting to raise rates this year and the ECB on hold at least until the end of the year. We expect the BoE to remain on hold throughout 2019 and to cut twice in 2H20”.
Despite a divergence in panelists’ views, the majority of our panelists still see the BoE raising rates at least once this year to ensure inflation remains close to target. The Consensus is for the Bank Rate to end 2019 at 1.01% and 2020 at 1.34%.