Pedestrians walk past the Bank of England (BOE) in the City of London, U.K. (Photographer: Simon Dawson/Bloomberg)

BOE Sees Brexit Breakthrough as Positive for U.K. Economy

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(Bloomberg) -- Bank of England policy makers said the breakthrough in Brexit negotiations this month could prove to be positive for the U.K. economy, which has lagged behind many of its international peers this year.

Having long been criticized for being overly negative on the fallout from Brexit, the latest commentary from the central bank noted the recent progress in a more positive light. Prime Minister Theresa May struck a deal last week on the first phase of the withdrawal from the European Union, just days after the process was almost derailed.

The BOE made the comments as it announced that its key interest rate will remain at 0.5 percent. The Monetary Policy Committee, which raised the benchmark last month for the first time in a decade, reiterated that “further modest increases” would probably be needed over the next few years if the economy performed as expected, without providing additional detail on the timing.

In minutes of the meeting, Governor Mark Carney and fellow officials noted that a “significant event had been the progress made in the first phase of the Article 50 negotiations, which was expected to allow them to proceed to their second phase, and for a transition period to be put in place.”

“This would reduce the likelihood of a disorderly exit, and was likely to support household and corporate confidence,” the BOE said.

The decision to hold rates was forecast by economists. Markets aren’t pricing in another increase until late 2018, and some observers say the bank may not move at all next year.

With Thursday’s announcement putting the BOE in a holding pattern, the next major focus is its February meeting, when the MPC will unveil new economic forecasts and, importantly, its annual assessment of the supply potential of the economy.

Supply Side

Potential growth played a large part in driving November’s rate hike, with the bank warning at the time of a buildup of unwelcome domestic inflation pressures due to persistently sluggish productivity growth and a Brexit-related loss of labor supply. Headline U.K. inflation is already above the BOE’s 2 percent target, reaching 3.1 percent in November.

The other “significant” event cited by the BOE was Chancellor of the Exchequer Philip Hammond’s Budget in November, which it said would provide a small upside to both economic growth and inflation in the coming years.

On a more downbeat note, the BOE said Brexit remains the “main challenge” for monetary policy and that recent indicators of economic growth this quarter have been “softer than expected.” It also repeated its oft-used line any rate increases will be limited and gradual. 

The U.K.’s central bank decision was announced amid a flurry of others. The Fed raised rates yesterday, the People’s Bank of China followed with a mini hike of its own, while the European Central Bank kept policy unchanged on Thursday. Other policy decisions this week include Switzerland, Iceland, Norway, Turkey, Ukraine, Mexico, Chile, Indonesia, Colombia, Peru, and Russia.

©2017 Bloomberg L.P.

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