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Carney Flags Risks as Two BOE Officials Push for a Rate Cut

Bank of England policy makers voted 7-2 to keep borrowing costs on hold this month.

Carney Flags Risks as Two BOE Officials Push for a Rate Cut
Mark Carney, governor of the Bank of England, speaks at the delayed annual Mansion House speech, usually delivered at the annual Bankers and Merchants dinner, at Mansion House in London, U.K. x

(Bloomberg) --

The Bank of England highlighted increased threats to growth from Brexit and a weaker global economy on Thursday, even hinting that it could be forced to join other central banks and loosen monetary policy.

Governor Mark Carney summed up the situation by saying risks to the outlook are “skewed to the downside,” and markets responded by increasing bets on an interest rate cut next year. It’s become so worrying for two policy makers that they wanted to cut interest rates immediately, though they were outvoted by the majority, at least for now.

Carney Flags Risks as Two BOE Officials Push for a Rate Cut

While the government has secured a Brexit deal with the European Union, the situation remains fluid, with an election next month and an accelerated transition timetable to meet. Minutes of the BOE’s meeting stated that “if global growth fails to stabilize, or if Brexit uncertainty remains entrenched, monetary policy may need to reinforce the expected recovery.”

The dovish tilt means the BOE is shifting closer to other central banks, such as the Federal Reserve and the European Central Bank, which have already cut interest rates this year. Still, with signs that U.S.-China trade tensions could ease and global growth stabilizing, the scenario that would demand BOE action may not come to pass.

What Bloomberg’s Economists Say...

“We agree that there are some scenarios over the coming year that would warrant rate cuts. But there are also several paths, including our base case, where tighter policy will likely be needed.”

--Dan Hanson. Read the full BOE REACT

Policy makers voted 7-2 to keep borrowing costs on hold this month. No economist in a Bloomberg survey forecast that result, with the surprise dissent prompting a slide in the pound. Michael Saunders and Jonathan Haskel wanted to lower the benchmark by a quarter point -- the first votes for looser policy since 2016 -- because of threats to the economic outlook and signs that the labor market might be starting to deteriorate.

Carney Flags Risks as Two BOE Officials Push for a Rate Cut

Alongside the decision came new forecasts from the BOE. It now sees 2020 growth at 1.2% -- which would be the worst since 2009 -- compared with 1.3% previously expected. The overall level of output will be 1% lower at the end of the three-year forecast period than anticipated in August.

Carney told reporters that one of the main differences between the current forecasts and previous ones is that they now assume the nation will leave the EU with Prime Minister Boris Johnson’s Brexit deal. Previously, the bank assumed a more gradual transition to an average of possible outcomes.

The governor also said growth might be supported by fiscal policy, a slight pickup in the global economy, and most importantly a reduction in Brexit uncertainty.

“That’s an assumption,” he said. “Events will see if that transpires.”

The global outlook has gotten worse, Carney also said, though it may not lead to a worldwide recession.

“All forms of protectionism are becoming more pervasive, persistent, and more damaging than certainly had been expected a few years ago,” he said. At the same time, “we don’t see the types of fundamental imbalances that are normally associated with the economy tipping into recession.”

Carney wouldn’t be drawn on whether he would extend his tenure to see the U.K. through Brexit. He’s currently due to step down the same day that country is due to leave the European Union. The Treasury says they won’t name a successor until after the Dec. 12 election, which leaves a very short transition period for the new governor.

--With assistance from Fergal O'Brien, David Goodman, Lucy Meakin, Zoe Schneeweiss, Catherine Bosley, Jeannette Neumann and William Horobin.

To contact the reporters on this story: Brian Swint in London at bswint@bloomberg.net;Jill Ward in London at jward98@bloomberg.net

To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Fergal O'Brien, David Goodman

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