BOE to Hold Fire as Bets on 2020 Cut Grow: Decision Day Guide
BOE officials led by Governor Carney will vote to keep interest rates unchanged at 0.75%, said economists surveyed by Bloomberg.
(Bloomberg) -- The Bank of England looks set to keep interest rates on hold on Thursday amid mounting speculation policy makers will ease policy in 2020.
In their first meeting since Boris Johnson’s decisive election victory, BOE officials led by Governor Mark Carney will vote to keep interest rates unchanged at 0.75%, according to economists surveyed by Bloomberg.
While the Conservatives’ win reduces the short-term uncertainty surrounding Brexit, most analysts expect Michael Saunders and Jonathan Haskel to repeat their calls for lower interest rates this week, with some even expecting a third -- most likely Gertjan Vlieghe-- to join the dissent.
Another split vote would help reinforce expectations that the BOE, which has stayed out of 2019’s global wave of central bank easing, will cut rates next year. Traders are already adding to bets on such a move, with Johnson’s rhetoric since the election pushing money markets to price in about an 80% probability of a reduction by December 2020, up from about 30% on Friday.
Political Concerns
The biggest change since November’s meeting -- when Saunders and Haskel first voted for a cut -- has come in the political arena, with Johnson winning a clear majority at the Dec. 12 election. The result all but guarantees the U.K. will leave the European Union with a transition deal in place on Jan. 31, a fact acknowledged by Carney on Monday when he said the risks of a disorderly Brexit have fallen.
Still, within hours of those comments investors got a reminder that those risks remain, as Johnson signaled he will change the law to ensure the Brexit transition phase is not extended, setting up a new cliff-edge for a chaotic split from the EU at the end of next year. On Tuesday, Deutsche Bank analysts said they now expect the BOE to cut rates in January, partly as a result of concerns about such a prospect.
Economic Outlook
The case for lower rates may also have been bolstered by recent reports that raised red flags about the strength of the economy. Data in recent weeks has shown output flatlined in the three months through October, and the labor market’s near record strength is starting to turn, with vacancies dropping and pay growth slowing. IHS Markit said this week that U.K. factories posted the weakest performance in more than seven years in December, increasing the chances that the economy will shrink in the fourth quarter.
Some are becoming more optimistic about the U.K.’s prospects. Both S&P Global Ratings and Fitch Ratings improved their assessment of the nation’s credit outlook this week following Johnson’s election win, with the former citing the diminished risk of a no-deal Brexit.While officials have been unable to comment on the outlook in recent weeks due to an election quiet period, Carney said on Monday that they will provide a high-level update on the economy on Thursday.
What Our Economists Say:
“The Bank of England is likely to remain in its current holding pattern in December. We expect another vote split, with those in favor of a rate cut citing the recent run of weak data.”
-- Dan Hanson, Bloomberg Economics. Click here for the full preview
Weak Inflation
Recent inflation data may bolster the case for easier policy. A report Wednesday showed the rate held at 1.5% in November, the lowest in three years and well below officials’ 2% target. The central bank expects it to slow further next year and stay below their goal until the second half of 2021, while the pound’s political-fueled rally -- which has seen it climb almost 11% against the currencies of Britain’s major trading partners since mid-August -- may act as a further drag.
New Governor
Hanging over the meeting is speculation over the identity of the successor to Carney, who is due to leave the bank on Jan. 31. The appointment process has been long and delayed by the election, but investors are now on high alert for the decision after the Tories’ win.
On Tuesday, a person familiar with the process said that government is in the final stages of choosing the new governor, and Chancellor Sajid Javid’s decision could be announced this week.
To contact the reporters on this story: David Goodman in London at dgoodman28@bloomberg.net;Jill Ward in London at jward98@bloomberg.net
To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Brian Swint, Andrew Atkinson
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