BOE Downgrades Growth and Inflation Forecasts, Expects Fewer Tightening Despite Retaining Forward Guidance

Central banks news

BOE joined other central banks in downgrading the economic growth outlook. In addition to heightened risks of global growth slowdown, ongoing Brexit uncertainty is the key concern for the members. The members voted unanimously to keep the Bank rate at 0.75% and the asset purchase program at 435B pound. With the policy rate only +50 bps above the level of the post-referendum reduction and no change in the QE program, BOE’s monetary policy is more accommodative than that of the Fed. While Governor Mark Carney affirmed that the next move should be a hike and the forward guidance stayed unchanged, it is based on the underlying assumption of smooth Brexit. Only when the chance of no-Brexit is reasonably ruled out can we, and the central bank, provide a more meaningful forecast on the timing of the next rate hike.

The central bank acknowledged that the global economy has slowed over recent months. Domestically, it noted that economic growth “slowed in late 2018 and appears to have weakened further in early 2019”. The members believed the moderation was driven by “softer activity abroad and the greater effects from Brexit uncertainties”. Inflationary pressure has greatly eased with headline CPI in December falling to +2.1% y/y. The members expected it to “decline to slightly below” the +2% target in the near term, due to “the sharp fall in petrol prices”. Yet, they still believed inflation to settles at a rate “a little above the target”.

The staff significantly downgraded its growth and inflation forecasts. GDP growth is revised lower to +1.2% (from +1.7%) and +1.5% (from +1.7%) for 2019 and 2020 respectively. Yet, growth for 2021 is revised higher by +0.2 percentage point to +1.9%. Inflation is expected to moderate to +2% (from +2.1%) for 2019, before improving to +2.1% in both 2020 and 2021.

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may therefore provide less of a signal about the medium-term outlook”. At the press conference, Carney warned that no-deal Brexit, despite its low probability, would increase the chance of recession in the UK. After the parliament’s rejection on PM Theresa May’s deal and EU’s reluctance to negotiate “alternative arrangement” on Irish border, the deadlock signals that the UK might have to leave the EU with no deal or it might not be able to leave on time (March 29). According to Carney, the “timing of Brexit agreement and its implementation could change”. This could affect the movement of British pound, which in turn could affect the inflation outlook, given the country’s heavy reliance on exports

On the monetary policy outlook, the BOE reiterated that, “were the economy to develop broadly in line with its Inflation Report projections, an ongoing tightening of monetary policy over the forecast period, at a gradual pace and to a limited extent, would be appropriate to return inflation sustainably to the 2% target at a conventional horizon”. This suggests that the next move would still be a hike. Of course, any rate hike would only take place after “the fog of Brexit” is clear. Another point to note is that BOE’s forecasts were made under the assumption of “market-based Bank Rate expectations”. Given the market has markedly push back the expectation on rate hike, less tightening will be required to keep inflation at target. The market now expects only one rate hike in the coming 2 years, down from two in November. Therefore, although BOE has retain its forward guidance, it is forecasting fewer rate hikes than was suggested in November.

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