MNI REVIEW: BOE Leaves Policy On Hold; Negative Rates In Box

The Bank of England Monetary Policy Committee voted unanimously to leave monetary policy on hold at its September meeting, taking a wait-and-see approach on incoming economic data, the apparent resurgence of Covid-19 across parts of the UK and the ongoing Brexit talks with the European Union.

The Bank kept interest rates on hold at 0.1% and its cumulative stock of QE at GBP745 billion, delaying any decision on extending its current asset purchase programme until later in the year. However, policymakers are engaging further with regulators to explore just how ready UK financial institutions are for negative rates if such an easing is needed at a future date.

Without elaborating, the MPC minutes noted discussions and briefings on negative rates had continued at the BOE since the August meeting and the Bank, adding that the Bank and the Prudential Regulation Authority will begin structured engagement on the operational considerations of negative rates in Q4.

ASSET PURCHASES

The planned pace of asset purchases was also maintained, with the current round expected to be completed "around the turn of the year".

Although the decision was widely expected, there had been speculation that some MPC members could dissent and vote for an early expansion of the asset purchase scheme, but the minutes published alongside the decision highlighted the uncertainty around economic developments and put the spotlight firmly on the November meeting.

The uncertainly was underlined with the MPC minutes acknowledging the continued downside risks to economic growth.

The MPC chose not to expand its thinking around both Brexit and the likely path of the pandemic at this meeting, pushing more detailed thinking back into the November forecast round. It side-stepped the Brexit issue, where its working assumption is that a trade deal will be struck between the EU and the UK, although this has been called into question by the latest acrimonious public exchanges.

The MPC will "consider economic issues relating to Brexit within the context of its wider forecast discussions ahead of the November MPC meeting," the minutes said.

INFLATION

The fall in headline inflation on the target CPI measure to just 0.2% year-on-year was downplayed, with the MPC citing some of upward pressure on prices and stating inflation was likely to run higher than expected in August, although still well below the BOE's 2% target

However, Governor Andrew Bailey did have to write an explanatory letter to Chancellor Rishi Sunak, explaining the whys and hows of the inflation miss.

Continuing softness in wage growth and the risk of accelerating unemployment were expected to push down on prices. The MPC warned against placing much weight on the latest labour market data, with firms still waiting to see how the Covid pandemic plays out.

"Reports from the Bank's Agents indicated that some companies were waiting to see how demand unfolded before deciding whether, and on what scale, to enact any redundancy plans later in the year," the minutes said.

The MPC also noted that the government's furlough scheme was muddying the employment outlook, although stronger than expected activity data suggested that the unemployment hit may be less heavy than previously assumed. But against that, fast changing consumer behaviour could deliver a greater shock than anticipated.

Given that recent shifts in the pattern of consumption spending had occurred much more quickly than in previous periods of structural change, employment in the worst-affected sectors could fall to a greater extent than envisaged, the MPC said.