The tone of December’s Monetary Policy Committee (MPC) statement and minutes was barely changed from November, indicating that the MPC is content to sit on its hands for the time being. As a result, we remain comfortable with our view that interest rates will remain on hold throughout 2020, but with the risk of a rate cut early in the year.
- The tone of December’s Monetary Policy Committee (MPC) statement and minutes was barely changed from November, indicating that the MPC is content to sit on its hands for the time being. As a result, we remain comfortable with our view that interest rates will remain on hold throughout 2020, but with the risk of a rate cut early in the year.
- The vote to keep rates on hold at 0.75% was split again, with the same two members – Michael Saunders and Jonathan Haskel – voting to cut rates immediately. And the minutes retained their dovish tone. After all, there was no alteration to the guidance in the minutes that “if global growth fails to stabilise or if Brexit uncertainties remain entrenched, monetary policy may need to reinforce the expected recovery in GDP growth and inflation”.
- But there were some hawkish elements too. Indeed, the tentative signs of stabilisation and the de-escalation of the US-China trade war appears to have alleviated the MPC’s concerns about a further weakening in global growth.
- And at least the Committee does not seem to have become more concerned about the domestic outlook since its last meeting in November. Admittedly, the Bank nudged down its Q4 GDP growth forecast a touch from 0.2% q/q to 0.1% q/q and pointed to further signs of a loosening in the labour market.
- But it highlighted that the labour market is still tight and it still seems concerned about the possibility of building domestic cost pressures, stating that “unit labour costs have continued to grow at rates above those consistent with meeting the inflation target in the medium term”. Overall, it judged that the “economic data since the MPC’s previous meeting had been broadly in line with the November Report”.
- Meanwhile, the key reason most MPC members decided to remain on hold today appears to be to allow greater time to assess whether Brexit uncertainty is fading. Indeed, the Bank noted that “there was no evidence yet about the extent to which policy uncertainties among companies and households had declined” and that “initial information would not become available until early next year.”
- So the key message this time round is that the MPC still remains some way from being persuaded of the case for an imminent rate cut (or future hikes). Of course, a cut in the coming months is possible if the economic news fails to improve. So we think that the markets are right to price in a 22% or so chance of the MPC cutting rates from 0.75% to 0.50% by March. (See Chart 1.)
- But if we are right in thinking some fading in Brexit uncertainty and the prospect of a fiscal boost will prompt a pick-up in GDP growth from 1.2% this year to 1.8% in 2021, that should keep the MPC on hold throughout 2020. And, depending on what happens with Brexit, it is possible that rates could be raised by 25bp to 1.00% by the end of 2021, a prospect not yet being considered by the markets. (See Chart 2.)
Chart 1: Market-Implied Probability of 25bp Interest Rate Cut by Date (%)
Chart 2: Expectations for Bank Rate (%)
Sources: Refinitiv, Capital Economics
Ruth Gregory, Senior UK Economist, +44 20 7811 3913, firstname.lastname@example.org