The nine-member Monetary Policy Committee at Bank of England voted 7-2 to keep Bank Rate at 0.75 per cent.Clodagh Kilcoyne/Reuters
Two Bank of England officials unexpectedly voted to lower interest rates on Thursday to ward off an economic slowdown, and others including Governor Mark Carney said they would consider a cut if global and Brexit headwinds do not ease.
Economists polled by Reuters had expected the BoE to vote unanimously to keep bank rate at 0.75 per cent, and the announcement of the 7-2 split pushed sterling to a two-week low as market odds on a cut next year rose as high as 80 per cent.
To date, the BOE has resisted after the U.S. Federal Reserve and the European Central Bank in cutting its main interest rate, but Thursday’s Monetary Policy Report positions the BOE for a change in stance.
Mr. Carney said the BoE’s central scenario was that a slowdown in global growth would stabilize and that Prime Minister Boris Johnson’s Brexit deal – which Parliament has yet to approve – pointed the way to a reduction in Brexit uncertainty.
If this scenario unfolds, the BoE would still be able to stick to its long-standing message about limited and gradual rate hikes.
But if the outlook deteriorates, the BoE said a rate cut would become more likely.
“These are pretty big tectonic forces operating right now,” Mr. Carney told reporters. “If global growth fails to stabilize or if Brexit uncertainties remain entrenched, monetary policy may need to reinforce the expected recovery in U.K. GDP growth.”
For Monetary Policy Committee members Michael Saunders and Jonathan Haskel, it was already time to act – they cast the first votes for a rate cut since shortly after the 2016 Brexit referendum.
“In the short-term at least, it seems the MPC is more concerned about the downside risks to growth and is prepared to pull the trigger on a rate cut if and when these risks materialize,” PwC economist John Hawksworth said.
The BoE is also grappling with uncertainty about an election that Mr. Johnson has called for on Dec. 12, in a bid to get a majority to pass his Brexit deal before a new deadline of Jan. 31.
The two main political parties are promising to end years of austerity and spend billions on infrastructure – aided by record-low interest rates – to try to fuel growth.
JOB MARKET WORRIES
Mr. Saunders and Mr. Haskel pointed out reduced job vacancies that suggested Britain’s hitherto strong labour market was weakening, as well as risks from the world economy and Brexit.
Other MPC members showed a new openness to cutting rates if things soured. They also softened their language on the need for limited and gradual rate hikes in the medium term, saying they “might” rather than “would” be necessary.
But economists at HSBC said a rate cut was not a certainty, as some policy makers looked concerned about rising labour costs.
“As we think may be the case for other central banks, uncertainties and divisions may mean the ultimate outcome is to stay on hold,” HSBC’s Simon Wells and Chris Hare wrote.
The BoE as a whole painted a darker picture for Britain’s economy over the next three years, predicting it will grow 1 per cent less over the period than it had forecast in August, mostly owing to a weaker global economy and a recently stronger pound.
But part of the growth downgrade reflected Mr. Johnson’s Brexit plans.
The BoE now assumes Britain will strike a trade deal that leads to new customs checks and puts up barriers to exports of financial and legal services.
The growth forecast would have been weaker still without higher spending announced by the government in September, which the BoE said would add 0.4 per cent to the economy.
Inflation, currently 1.7 per cent, is forecast to drop to 1.2 per cent in the middle of next year because of lower oil prices and regulatory caps on electricity and water bills.
But over the next couple of years, the BoE sees economic growth picking up from 1.4 per cent in 2019 to 2 per cent in 2022. The 2022 growth rate is above Britain’s long-term trend and would push inflation back above the BoE’s 2-per-cent goal, the central bank said.
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