BOE Holds Rates in Carney’s Swansong as Britain Exits EU
Policy makers voted 7-2 to keep the benchmark at 0.75%, an unchanged split that belied investor expectations.
(Bloomberg) -- The Bank of England kept interest rates on hold in Governor Mark Carney’s final meeting, waiting for more evidence of an economic rebound before supporting it with a cut. The pound jumped.
Policy makers voted 7-2 to keep the benchmark at 0.75%, an unchanged split from their previous meeting that belied investor expectations the decision was on a knife-edge. The committee noted that surveys of business activity have picked up “quite markedly in some cases” since Prime Minister Boris Johnson’s election victory removed much of the near-term uncertainty related to Brexit.
Yet officials also signaled easing may be needed soon, cutting their GDP forecasts to the lowest level since the global financial crisis and predicting that inflation will only return to target by the end of 2021 if rates are cut to 0.5% in the next year.
Carney also stressed that the updated economic projections assume “an immediate but orderly move” to a new “deep free trade agreement” with the EU at the end of the year.
“This is less of a case of so far so good, and more a case of so far, good enough,” Carney said in a news conference that followed the announcement.
The pound rose to its highest in a week, trading 0.6% higher at $1.3098 at 1:28 p.m. London time. Investors are no longer fully pricing in a rate cut this year; prior to the decision they expected one by August.
What Bloomberg’s Economists Say...
“We expect the central bank to act quickly if the boost to sentiment seen since the election fails to translate into higher spending. Our base case is that accelerating growth combined with a fiscal stimulus in the March budget will mean the BOE refrains from easing.”
-Dan Hanson. See his BOE REACT
If EU trade talks struggle or the economy weakens anyway, the decision on a BOE response will fall to Carney’s successor, Andrew Bailey. He’ll take up his post in mid-March, the same month the government unveils a budget that ends almost a decade of austerity.
That fiscal boost isn’t included in the current forecasts, and officials said slower-than-expected supply growth will keep a lid on the expansion.
“Policy may be need to reinforce the expected recovery in U.K. GDP growth should the more positive signals from recent indicators of global and domestic activity not be sustained or should indicators of domestic prices remain relatively weak,” minutes of the meeting showed.
The BOE also tweaked its language on the need for limited and gradual rate increases if growth comes in line with projections, saying just “some modest tightening” might be required.
The forecast for GDP was cut to 0.75% gain this year, from 1.25% in November. Projections for 2021 and 2022 were both a quarter-point lower. Based on money-market pricing for a rate cut this year, inflation is seen returning to the 2% target in 2021. Without the cut, the forecasts show it remaining below that mark.
The BOE sat out the global central bank easing of the past year as the European Central Bank restarted its bond buying. The Federal Reserve reduced borrowing costs three times in 2019. It kept its benchmark on hold on Wednesday, albeit with dovish overtones.
Michael Saunders and Jonathan Haskel maintained their push for an immediate rate BOE cut, saying that indicators of expectations hadn’t been a close guide to output and that downside risks to growth remained.
Investors had predicted a 50% chance of a cut heading into the meeting, while 17 of 61 economists also expected a move. That may open Carney to further criticism over his communications after a lawmaker dubbed him an “unreliable boyfriend” near the start of his tenure.
“Markets can read the data and different people in the market had different views on what the right decision would be, or what our decision would be,” Carney said. “But we’re the ones who take the decision and the judgment is laid out, and we’ll see how the economy evolves consistent with that.”
--With assistance from Harumi Ichikura, Piotr Skolimowski, Carolynn Look, Jill Ward, Catherine Bosley, Alaa Shahine, Zoe Schneeweiss and Andrew Atkinson.
To contact the reporters on this story: Lucy Meakin in London at lmeakin1@bloomberg.net;David Goodman in London at dgoodman28@bloomberg.net
To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net;Fergal O'Brien at fobrien@bloomberg.net
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