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BOE Preview – Staying Cautious about Brexit Outlook

For QE expansion at the last meeting, we expect the BOE will keep its powder dry this month. BOE should leave the Bank rate unchanged at 0.1%, and the size of asset purchases (QE) at 875 pound. There have been mixed developments since the November meeting. Economic data released during the intermeeting period suggested that recovery remained underway but at a decelerated pace. Yet, the UK has become the first country to begin vaccinating its citizen with coronavirus shot. The government has indicated that life will return to normal by April 2021. Meanwhile, Brexit talk broke down last week. Despite extended negotiations in order to strike deal before the transition period ends in two weeks’ time, both the UK and the UK have admitted that the chance of no deal has increased significantly.

GDP growth eased to +0.4% m/m in October, from +1.1% in the prior month. From a year ago, the economy contracted -8.2%, compared with -8.3% as expected and -8.4% in September. On the job market, the Claimant count unemployment increased +64.3K in November, after a -29.8K decline a month ago. The number of payroll contracted -144K in the 3 months through October, less severe than consensus of -250K and -164K in September. The ILO unemployment rate added +0.1 ppt to 4.9% during the period. Inflation is expected to stay soft. The market currently projects the headline CPI eased to +0.6% in November from +0.7% in the prior month. Core inflation probably eased to +1.4% from October‘s +1.5%.

Brexit negotiations remain the biggest uncertainty to the UK’s economic outlook and BOE’s policy stance. The breakthrough over the weekend was that UK PM Boris Johnson has made concession on the level playing field and is now pushing the bloc to soften its demands on fisheries. However, the only thing the UK and the EU have agreed is that the chance of a no-deal Brexit is very high. Since talks are still ongoing, we believe the BOE will take a wait and see mode on the developments without taking any actions. However, if the talks eventually collapse and the UK would leave the EU without a deal (resorting to WTO trade agreement), we expect the BOE to hold an emergency meeting and announce additional easing measures before the next meeting.

While we expect BOE to leave all measures unchanged this month, it might reveal more details about the negative interest rate mechanism as a review of the feasibility of negative interest rates has been carried out for months. Meanwhile, it was noted at the November minutes that the QE program is under review and the central bank would “re-evaluate the existing technical parameters of the gilt purchase program”. It could be possible for some details to be unveiled in this regard.