BOE Left Policy Rate at 0.75%. Two Members Voted for Easing

Although the Bank rate stayed unchanged at 0.75% as expected, it is surprising to see two members voted for a rate cut. At the minutes, BOE has left the door open for a rate cut for the first time. British pound slumped as the message came in more dovish than anticiapted.

The central bank revised lower its GDP growth forecast to +1.2% y/y for 2020, compared with +1.3% projected in August. Growth for this year is revised higher, by +0.1 percentage point, to +1.4%. Inflation forecasts are downgraded across the board. Based on market interest rate, inflation in one year’s time is revised lower to 1.51%, from +1.9% in August. Inflation expectations in two years and three years are revised lower to +2.03% and +2.25%, from +2.23% and +2.37% respectively. As the central bank noted, the market expects lower policy rate to 0.5% in 2022.

Jonathan Haskel and Michael Saunders voted to lower the policy rate by -25 bps in this month. They indicated that the economy had “a modest but rising amount of spare capacity”, while “core inflation was subdued”. They added that vacancies and short-term unemployment are indicators suggesting that the “labor market was turning”. They were concerned about downside risks to the central bank’s economic projections, in light of “weaker world outlook” and “Brexit uncertainties”.

In the concluding statement, BOE reiterated that monetary policy could respond “in either direction”. Yet, it added a reference that “if global growth failed to stabilize or if Brexit uncertainties remained entrenched, monetary policy might need to reinforce the expected recovery in UK GDP growth and inflation”. This is the first time that the central bank has opened the door the easing. The language used concerning potential rate hike has changed. As noted in the statement, if the economy recovers as projected, “some modest tightening of policy” may be “needed”. This is compared with the reference in September that “increases in interest rates” would be “appropriate”.