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--MPC Votes 7-2 To Keep Rates Unchanged; 9-0 To Keep QE Stock Unch
--BOE Projections On One 25bps Cut In 3yrs; Show Clear CPI Overshoot
By David Robinson and Irene Prihoda
LONDON (MNI) - The Bank of England Monetary Policy Committee voted
seven-to-two to leave policy unchanged at its November meeeting, with
independent members Michael Saunders and Jonathan Haskel voting for an
immediate 25 basis point cut in rates.
The MPC stuck to its collective view, expressed in the Monetary
Policy Summary, that limited and gradual tightening was still likely to
The following are key points from the Monetary Policy Report (MPR):
-November saw the first MPC votes for a cut since August 2016, and
marked a clear shift in the debate, with the near-term choice now
clearly between easing and holding policy steady.
-The MPC dropped its forecasting convention, adopted in the wake of
the June 2016 European Union referendum, that there would be a smooth
transition to a range of Brexit end-states.
Instead it assumed that the deal struck by Prime Minister Boris
Johnson with the EU would be implemented, paving the way for a fairly
basic free trade agreement similar to Canada's. This will again leave
the BOE assumptions at odds with financial markets - as these factor in
concerns over a 2020 cliff-edge when the transition period ends.
In the central BOE forecast Brexit uncertainty fades in the latter
stages of the three year projections. The BOE assumptions included no
tariffs on UK-EU trade, some barriers to services trade and customs
checks being introduced, with no new non-EU trade deals struck in the
three year period.
-UK GDP growth is forecast to be weak in 2019 and 2020, at 1.25%
and to only pick-up gently to 1.75% in 2021 and 2.0% in 2022. Inflation
on mareket rates on the 2.0% target CPI measure undershoots markedly in
2020, standing at 1.17% in Q3 next year, but then rises above target to
reach 2.03% in Q4 2021 and 2.25% in Q4 2022.
This inflation profile could be used to justify the majority view
on the MPC that "some modest tightening of policy, at a gradual
pace and to a limited extent, might be needed."
The projected inflation overshoot, however, was based on market
rates assumptions for Bank Rate to fall from its current 0.75% to 0.5%
next year and to stay there through the forecast period.
On constant 0.75% Bank Rate inflation was shown still undershooting
in Q4 2021 at 1.89% before rising to 2.10% in Q4 2022.
-The Monetary Policy Report showed that as a result of near-term
weak growth, a negative ouput gap of 0.25% of GDP opens up in 2019 and
through 2020 before turning positive in 2021.
-The MPC did not make any comments directly addressed to current
market rate assumptions.
--London Bureau; e-mail: firstname.lastname@example.org