BOE Remains Boxed in by Brexit as No-Deal Fears Trump Wage Gains
(Bloomberg) -- Bank of England officials are stuck in a Brexit rut, as the U.K.’s increasingly chaotic political backdrop looks set to drown out any talk of higher interest rates.
The Monetary Policy Committee, which has said that the U.K. needs limited and gradual hikes, will nonetheless vote unanimously to keep interest rates unchanged at 0.75 percent next week, according to the majority of economists in a Bloomberg survey. Officials will also lower both their growth and inflation forecasts for 2019.
With less than two months until the U.K. leaves the European Union and no clarity on what form the exit will take, Governor Mark Carney’s press conference on Feb. 7 will likely be dominated by Brexit. The chances of a no-deal outcome -- which the BOE have warned could severely damage the economy -- increased last week after Prime Minister Theresa May promised to go back to Brussels to seek concessions from an uncompromising European Union.
“The MPC will remain on hold, primarily as they appear to have little option at this stage given the uncertainty over Brexit,” said Cathal Kennedy, an economist at the Royal Bank of Canada.
As well as keeping their hands tied on policy, Brexit is also complicating the BOE’s forecasting. The central bank projections are based on an average range of outcomes, and so are likely to need tweaking even if May manages to secure a deal. A chaotic exit, meanwhile, could render them completely obsolete.
Nevertheless, with markets not pricing in any hikes this year and other central banks around the world taking a more cautious approach, the BOE’s outlook could still prove a useful messaging tool.
Officials are also due to publish their annual review of the supply side of the economy, which last year saw them cut their prediction for the U.K.’s potential growth to 1.5 percent, buttressing their arguments that the economy was at risk of overheating.
Next week, any comments on wage growth -- currently at the highest in a decade -- will be particularly in focus, as some officials become increasingly convinced that domestic inflationary pressures are building. While HSBC is the only bank in Bloomberg’s survey that sees a split as soon as next week, there are signs the policy debate in Threadneedle Street may get more heated as soon as the Brexit outcome becomes clear.
What Our Economists Say...
|“The Bank of England is stuck in a Brexit bind, but while the chances of policy action at its February meeting are next to zero, we think the BOE is likely to convey a hawkish message. Rate expectations have been clouded by Brexit noise and the central bank will want to prepare investors for the possibility that rates could go up as soon as May.”|
-- Dan Hanson, Bloomberg Economics. Read the full PREVIEW
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