Bank Rate Held by Monetary Policy Committee as Brexit Uncertainty Looms
This is, at least, slightly more generous for investors than the historically low 0.25% that was instigated in August, 2016. There was also unanimity on the maintenance of both corporate and government bond purchases. Board members voted to retain stock of UK government bond purchases - which are financed by the issuance of central bank reserves - at £435 billion.
With monetary policy focused on ensuring that a 2% inflation target is met, the Bank of England chose to hold fire on an interest rate rise at this juncture. The committee noted that the outlook for economic growth globally is looking less promising than in recent months, and this necessitates a waiting approach for the time being. Corporate credit markets have become particularly tight, and this was seen as a significant factor in the bank's policy.
However, the looming spectre of Brexit continues to weigh heavily on fiscal decisions. Britain's imminent exit from the European Union was heavily referenced in the statement from the bank, and this critical aspect of European politics promises to influence economic measures for some time to come.
In the current climate of uncertainty surrounding Brexit, with the ultimate outcome of negotiations between the British government and the European Union still unclear, it is perhaps not surprising that the committee applied caution. As the Bank of England noted, the ongoing nature of discourse on Brexit has already damaged financial markets in Britain to some extent, with equity and sterling falling, and volatility rising.
The uncertainty that Brexit has stimulated has also had a negative impact on forecasts for UK growth, with the UK economy already operating in a challenging climate in which global growth is set to stagnate. Indicators from business investment, the housing market, and retail spending have been less than favourable, and there is certainly reason to believe that there could be choppy waters ahead for the British economy.
Previous commentary from the Monetary Policy Committee has noted that vacillating expectations regarding Brexit is resulting in a similarly unsettling volatility among UK fiscal data. With this in mind, the unanimous vote to hold interest rates can essentially be seen as a holding pattern, while the committee continues to monitor the impact and nature of the UK's EU withdrawal.
However, there were a few interesting takeaways for savers from this nonetheless cautious decision. The central bank did float the possibility of raising rates depending on the way that Brexit unfolds. Emphasising its commitment to maintain the UK CPI 2% inflation target, the bank noted that a disorderly exit from the EU could necessitate unplanned action from the Monetary Policy Committee, and that this could result in an interest rates shift in either a positive or negative direction.
Clearly a 'no-deal Brexit' would have a profound effect on Britain's economic position, and the committee has warned in previous comments that a recession more serious than the 2008 financial crisis would be quite feasible in this context. Regardless of this, the committee does intend to raise rates over a longer time period, as a measure against inflation.
And there is no doubt that the committee will be somewhat concerned about the overall UK economic picture, as inflationary pressures continue to brew worryingly. The UK labour market has been tight for some time, and the committee foresaw a possible scenario in which it is necessary to tighten monetary policy in order to sustain inflation in line with published targets.
Trading arrangements with the EU that result from Brexit will also have a major influence on the UK economic picture going forward, and the response of markets to this critical aspect of Brexit negotiations will almost certainly be a central pillar of future rates decisions. The committee noted that the appropriate path of monetary policy will depend on the balance of the effects of demand, supply and the exchange rate, with all options still on the table in a time of genuine uncertainty.
Ultimately, this latest meeting of the Bank of England's Monetary Policy Committee can be seen in this precise context...one of uncertainty. No-one wants to make any predictions or rash decisions with Brexit looming, and delaying broader fiscal policy for another month while Brexit negotiations continue seems a sensible approach.
The nine-member panel indeed noted that “heightened Brexit uncertainties were evident across a range of domestic financial markets. The further intensification of Brexit uncertainties, coupled with the slowing global economy, has also weighed on the near-term outlook for UK growth.”
It is thus difficult to predict the direction of rates in the medium-term, let alone the immediate period, but there is still clearly some intent to raise the Bank Rate, and offer a better deal for savers, in the foreseeable future. Should the post-Brexit climate be relatively calm then this will accelerate such decisions significantly.
About the author: Christopher Morris is an experienced economics and finance writer, journalist and editor, whose bylines include the Financial Times, Sunday Telegraph and Times Educational Supplement. His work has also featured in Newsweek, Seeking Alpha and InvestorPlace, while he is a regular contributor to ValueWalk and Activist Insight.