Bank of England to Hold Steady Amid Global Easing Wave: Decision Day Guide

(Bloomberg) -- The Bank of England looks set to stay out of the current wave of global easing as Brexit approaches.

The BOE’s nine policy makers, led by Governor Mark Carney, will vote to keep interest rates unchanged at 0.75% Thursday, according to all 63 economists in a Bloomberg survey. Many central bank watchers expect them to stick to the line that future hikes will be required if the U.K. leaves the European Union in an orderly fashion.

Global Easing

That stance will set them apart from other major global institutions, including the U.S. Federal Reserve and European Central Bank, which have both cut rates in the past week in the face of a global economic slowdown and concerns over a trade war.

The difference in approach was noted over the summer by BOE policy makers Michael Saunders and Andy Haldane, who were at pains to point out that the U.K. has a higher hurdle for monetary easing than their equivalents elsewhere.

Brexit Assumptions

One reason why the BOE can hold tight for now is that, while Brexit uncertainty in the U.K. remains heightened,it still has to take the government’s policy of leaving with a deal as a given. That means its assumptions exclude the risk of a no deal exit month.

What Our Economists Say:

“The Bank of England remains firmly stuck in the quagmire of Brexit. The U.K. is on track to avoid recession and inflationary pressure is building even as the global economy looks fragile. But until more is known about the next stage of the Brexit saga, the central bank will be in no rush to change its policy stance.”
-- Dan Hanson. Click here for full report

Traders don’t have that luxury, and bets on the BOE’s next move have swung wildly in the past few weeks. No deal looked more likely when Prime Minister Boris Johnson suspended parliament, and then less after lawmakers voted to compel him to seek an extension.

With Johnson still promising to take the U.K. out of the EU on Oct. 31, investors are betting the BOE’s next action will be a rate cut, but don’t see that coming until February 2021, compared with January 2020 in the aftermath of the central bank’s previous meeting.

Labor Market

The U.K.’s buoyant labor market has continued to create jobs over the summer. More pertinently wage growth, which policy makers study for signs of domestically generated inflation, is also surging, When including bonuses, it accelerated to 4% in the three months through June, the highest since 2008.

While Brexit uncertainty means that reading may not be enough to prompt votes for a hike this month, it will likely make the BOE’s more hawkish voters more confident of the need to increase rates if the divorce goes smoothly.

Inflation Slows

It also means policy makers may be less bothered by Wednesday’s inflation data, which showed annual price growth was just 1.7% in August. That drop could be short-lived as a weaker pound threatens to push up the price of imports, while fuel costs are at risk of increasing after an attack on Saudi Arabian oil facilities.

The economy contracted in the second quarter, but the BOE expects it to rebound in the three months through September.

©2019 Bloomberg L.P.