Bank of England Remains Stuck in Brexit Fix: Decision Day Guide

(Bloomberg) -- The Bank of England’s final policy decision of the year on Thursday remains hemmed in by Brexit uncertainty, less than 100 days before the U.K. leaves the European Union.

Since the Monetary Policy Committee’s November meeting, Britain’s political chaos has ratcheted up even further. Prime Minister Theresa May’s EU departure deal faces criticism from all sides and there’s a significant risk that the country crashes out without a deal.

That’s likely to keep the central bank’s hands tied. All but one of 61 economists in a Bloomberg survey predict officials will keep rates unchanged at 0.75 percent.

While the labor market is still giving officials reasons to be cheerful, there are also signs the uncertainty is hurting the real economy, further undercutting arguments for immediate action. Investors are unsure whether policy makers will be able to deliver even a single rate increase next year. Officials say they’ll need a series of limited and gradual series of hikes to contain inflation.

Bank of England Remains Stuck in Brexit Fix: Decision Day Guide

What Our Economists Say...

“If it wasn’t for Brexit, the Bank of England would likely use its December meeting to prime investors for another hike in interest rates. But with the fog engulfing the U.K.’s departure as thick as ever, the central bank has very limited room for maneuver.”

-- Dan Hanson, Bloomberg Economics

In contrast, the U.S. Federal Reserve pushed on with its fourth rate increase this year on Wednesday, looking through a stock-market selloff and defying pressure from President Donald Trump. It did dial back projections for borrowing costs and economic growth in 2019.

In the U.K., as May struggles to garner domestic support for her Brexit deal, economic indicators are heading south. Retailers have complained about an abysmal holiday season, house prices are weakening and the British Chambers of Commerce slashed its 2019 forecast for business investment growth to just 0.1 percent from 1.2 percent previously.

Bank of England Remains Stuck in Brexit Fix: Decision Day Guide

Since its November Inflation Report, the BOE has also made headlines with its analysis of various Brexit outcomes, including an eye-catching scenario where a disorderly exit leads to the economy shrinking by 8 percent within a year, property prices plunging almost a third and rates climbing to 5.5 percent. While the report was designed to test the resilience of banks and compiled at the request of lawmakers, it still prompted renewed criticism over the the politicization of the central bank from pro-Brexit politicians -- and former governor Mervyn King.

Bank of England Remains Stuck in Brexit Fix: Decision Day Guide

The outlook for future rates could also be complicated by slowing inflation. A report Wednesday showed the annual rate of price gains slid to a 20-month low of 2.3 percent in November and Pantheon Macroeconomics’ Samuel Tombs predicts the measure will drop below the BOE’s 2 percent target as soon as the start of 2019.

Bank of England Remains Stuck in Brexit Fix: Decision Day Guide

Amid the Brexit gloom, one crumb of comfort is wages. Pay growth was one of the tenets of hawkish arguments made by some policy makers this year, and may be enough to spur them into further action in 2019 -- assuming the divorce from the EU goes smoothly.

Bank of England Remains Stuck in Brexit Fix: Decision Day Guide

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