As expected, the Bank of England voted unanimously to keep the Bank Rate at 0.75%. As it was one of the small meetings without an updated Inflation Report and a press conference and after last month's hike, this was not a big surprise.
The Bank of England did not make any big policy signal shifts either. The statement still says that ' any future increases in Bank rate are likely to be at a gradual pace and to a limited extent' and that ' ongoing tightening of monetary policywould be appropriate' . At the August meeting, the Bank of England hinted that while the nominal natural rate of interest (the rate where monetary policy is neither expansionary nor contractionary) is probably around 2-3% in the long-run, it is around 1.5% currently, so basically only three hikes away. The Bank of England has also hinted that it will not make changes to the QE programme before the Bank Rate has reached 1.5%.
We still expect the Bank of England to hike around once a year and our base case is that the next hike will arrive in May 2019 , so after the UK formally leaves the EU. It may be earlier (February) if the economy continues to surprise on the upside. On the other hand, the Bank of England also stated that Brexit uncertainty has gone up among businesses, as nearly 20% of companies now think Brexit is the key source of uncertainty. This probably explains why there is no growth in business investments.
The rate decision also depends on the outcome of the Brexit negotiations. One box in the Inflation Report explains the Bank of England's reaction in the event of a no-deal Brexit. The overall takeaway is that while the Bank of England cannot offset lower potential growth due to changes in the supply side of the economy, it can react to demand changes. Our view is that a 'no-deal Brexit' would most likely hit the economy through lower demand due to lower business confidence, which would most likely force the Bank of England to ease monetary policy by cutting the Bank Rate. Our base case is a 'decent Brexit' (see Brexit Monitor: Final deal unlikely before December , 18 October).
To read the entire report Please click on the pdf File Below..