Bank of England’s Hawkish Brexit Hold

With Brexit looming, it came as no surprise to anyone that the Bank of England unanimously left its main lending rate unchanged at 0.75% last week; the bank also maintained quantitative easing at £435bn. With the headline figures from “Super Thursday” providing no surprises and the quarterly inflation report also coming in as expected, the market initially shrugged it off, GBP & Gilts remained unchanged upon its immediate release.


However, the MPC minutes and its accompanying press conference provided a hawkish tilt; BoE Governor, Mark Carney warned that the bank may be forced to raise interest rates even in the event of a disorderly Brexit. This is largely seen as unusual as the central bank would usually be expected to lower rates to encourage investment in the event of any economic shock. This saw GBP close the day almost 2% higher (albeit in a weak USD setting).


“Since the nature of EU withdrawal is not known at present, and its impact on the balance of demand, supply and the exchange rate cannot be determined in advance, the monetary policy response will not be automatic and could be in either direction” – Gov. Carney


By stating that a rate rise may be necessary to control inflation if the supply of goods is seriously disrupted by a no-deal Brexit, the BoE clearly wants to stay ahead of the inflation curve, this could be perceived as a warning shot to the government that he would not be able to bail out the UK politicians (compromising the Bank’s independence) should they could not strike a Brexit deal with the EU.


This rationale is somewhat understandable when looking at the UK data – economic growth, household economic resilience, UK wage growth & construction PMI all remain on a firm footing. And despite business confidence being a touch soft, the broader economy may prove to be more resilient in the short term to an interest rate hike (in order to control spiralling inflation due to a falling pound post Brexit).


Furthermore, it is also worth noting that BOE’s latest set of inflation forecasts did not include the recent changes to the UK fiscal policy as highlighted in the “the end of austerity” budget by UK Chancellor earlier in the week – these new changes will clearly be adding to inflation pressures.


Whilst the BoE is clearly not going to raise rates until at least March 2019, the scheduled date for Brexit, amid intense divorce uncertainty, the BOE Inflation Report is hinting that a hike in May could be too late.


Although the market is pricing in very little change in terms of a rate hike in March 2019 at present in comparison with a week ago, sentiment on a definitive rate cut on a hard Brexit has diminished.


Given that modelling or forecasting for Brexit is such tumultuous task in itself, this latest hawkish stunt stance could simply be a free hedge, allowing the BoE to keep all options open in terms of monetary policy; as former Fed Chairman, Alan Greenspan once famously said “If I seem unduly clear to you, you must have misunderstood what I said”.


Author: James Sebastian


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