BoE likely to keep interest rates unchanged

The Bank of England’s (BoE) meeting will dominate the financial news headlines on Thursday November 1st 2018. The governing council of the BoE headed by Marc Carney will convene to decide on interest rates. As the Brexit date in March 2019 approaches the BoE’s decisions regarding the monetary policy that it would like to implement gain more and more importance. 

Economists suggest that the Monetary Policy Committee (MPC) of the BoE will keep its benchmark interest rate unchanged at 0.75% in its November meeting. They also forecast that all 9 MPC members will vote in favour of that. The MPC had voted unanimously to leave borrowing costs unchanged on September 13th 2018 with its decision coming in line with market expectations. The last time that the BoE raised its benchmark interest rate was in August 2018. 

A report by Nomura, which is one of the largest financial services group with headquarters in Asia, said that the BoE won’t likely alter its policy guidance in the upcoming meeting. Nomura’s analysts wrote in their report that “the CPI inflation has been volatile since the Bank published its August IR. Its forecasts for July, August and September 2018 had been for 2.6%, 2.4%, 2.4% but in the event the numbers came out at 2.5%, 2.7% and 2.4%. Despite this volatility, the most important point to note is the current rate of inflation for September 2018 is exactly where the Bank thought it would be three months ago – in other words, the point of departure for the Bank’s November 2018 forecast round is exactly as expected”. In the report’s end, they also note that Brexit remains a sizeable risk and that the weak global growth may put a strain on the effort to implement a more aggressive monetary policy. 

Economists at Internationale Nederlanden Groep (ING) believe that despite better economic activity over the past few months, Brexit is still the BoE’s number one priority. In an ING report released on October 29th 2018 it is noted that “in any other situation, we suspect the Bank of England would have been looking to increase interest rates pretty soon. Wage growth - something which has been at the heart of the Bank's rate hike rationale has been surprisingly strong over the past few months. But inevitably, Brexit remains policymakers’ number one consideration. That means we’re likely to see a unanimous vote to keep policy unchanged at Thursday's meeting, and we don’t expect a rate hike before May 2019.” The ING report mentions that “without the certainty that a deal will be in place in March, an increasing number of firms are likely to implement contingency plans, and this would inevitably put pressure on investment and hiring. If firms continue to become more vocal about the risks, consumer confidence could also take a hit.”

Rabobank’s economists seem to agree with their ING counterparts on the correlation between the BoE’s decisions and Brexit. “The MPC is ‘blinded’ by Brexit; the million dollar question is what kind of trading relationship will ultimately evolve from the negotiations. The Governor Mark Carney boldly stated that Brexit doesn’t handicap policy making, but this is a bluff. The economy has performed fairly well recently, yet no one expects the MPC to act,” they note in a report published on October 26th 2018. Rabobank’s research analysts continue to expect the MPC to act after Brexit in March 2019 and they forecast an interest rate hike in May 2019. 

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