BOE to Hold Steady as Brexit Fog Thickens: Decision Day Guide
The Monetary Policy Committee compiled its forecasts against a backdrop of political chaos.
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The Bank of England will probably keep interest rates on hold and cut its growth and inflation forecasts as Brexit questions continue to plague the economy.
The Monetary Policy Committee compiled its forecasts -- which will be published alongside the rate decision at noon on Thursday -- against a backdrop of political chaos, lackluster economic growth and no clarity on how the U.K.’s divorce from the European Union will be resolved. Economists expect the benchmark interest rate to remain unchanged at 0.75%.
The central bank’s quarterly analysis, re-named the Monetary Policy Report, will likely contain hints as to how officials are interpreting the latest Brexit developments. Britain is heading into an election on Dec. 12, and while the prospect of a no-deal exit has faded, there’s still a myriad of possible outcomes.
Governor Mark Carney will answer questions from reporters at 12:30 p.m. in London. Here are the issues that policy makers are grappling with:
Entrenched Uncertainty
With the U.K.’s deadline for leaving the EU now pushed back until Jan. 31 and an election on Dec. 12, businesses are still unsure whether increasing investment makes sense. Even if Prime Minister Boris Johnson wins the election and gets his withdrawal agreement through Parliament, the confusion over the U.K.’s exit from the bloc is set to carry on through 2020 or longer.
The continuously uncertain backdrop means U.K. business investment lags that seen in other G-7 economies. Policy makers Gertjan Vlieghe and Michael Saunders have indicated that if the situation persists, that could spur the need for rate cuts.
Forecast Changes
The majority of economists surveyed by Bloomberg see the BOE cutting its predictions for growth and inflation in 2020 and 2021, and raising the forecast for unemployment. The gloomier estimates are due to a faltering global economy, combined with Brexit’s impact. Furthermore, a stronger pound compared with the last forecasts in August and weaker demand mean the inflation outlook is also likely to be lower.
Bright Spot?
The labor market -- which has in recent years proved a bright spot amid the Brexit malaise -- is starting to show signs of strain. The economy shed jobs over the summer for the first time in two years, vacancies are declining, and wage growth is easing. That’s bad news for an economy powered by consumer spending. Inflationary pressures from the labor market could also be more subdued.
Brexit Outcomes
The BOE’s August forecasts took for granted the Conservative government’s ultimately unsuccessful policy of leaving the EU with a deal on Oct. 31. The deadline has now been pushed to Jan. 31, meaning the MPC could simply roll forward its assumption to the new exit date. Officials may also expound further on the scenario of “entrenched uncertainty” which they mentioned in the minutes of their September meeting.
Appointment Delay
Looming in the background of Thursday’s events is who will lead the central bank when Carney departs at the end of January. The Treasury planned to make a decision in the autumn, but the December election has thrown the process into confusion, and there may no announcement until after the vote. Carney will probably field questions from reporters on whether he’s been asked to extend his term for a third time in order to see through the Brexit process.
--With assistance from David Goodman.
To contact the reporter on this story: Jill Ward in London at jward98@bloomberg.net
To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Brian Swint
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