The MPC voted unanimously to maintain the bank rate at 0.75% at its meeting that ended yesterday, in line with prior expectations. The MPC minutes reiterated that, conditional on a smooth Brexit, further gradual and limited rate hikes are still likely to be necessary to return inflation sustainably to the 2% target. However, the Committee sounded more cautious on the outlook, for two main reasons:

First, since the last MPC meeting in November, the MPC judged that uncertainty over Brexit had “intensified”, reflecting the lack of progress in the ratification process in the UK parliament. Financial conditions in the UK have tightened, more than elsewhere, through higher bank funding costs, higher non-financial corporate credit spreads, and lower UK equity prices. Business surveys (particularly the PMIs) have weakened, the housing market “remained subdued”, and companies had a greater incentive to delay investment. Consequently, the Committee judged that the near-term outlook is weaker than it had expected, and it revised down its expectation for growth in the fourth quarter by 0.1 pp. to 0.2% qoq. And it expects growth to remain around that level in the first quarter of 2019.

The MPC also noted the rise in market-based measures of inflation expectations in the UK, which have diverged from the global picture of lower inflation expectations. In our view, it reflects that market participants are pricing in the likelihood that, in the event of “no deal” with the EU, the value of sterling will likely fall sharply, stoppages and delays at the border will weigh on supply and raise costs and, if the UK government chooses to apply a tariff schedule similar to that of the EU’s, tariffs will rise, all of which would raise inflationary pressure.

Second, the Committee noted that “downside risks to global growth had increased”. In part that’s because of lower global growth outturns than it had expected, and hence less momentum, particularly in the Euro area but – albeit to a lesser extent – in the US and China too. And in part because of a tightening in global financial conditions, which will weigh on global growth ahead.

Reflecting a more cautious MPC, the minutes said, “The MPC judged that the monetary policy response to Brexit, whatever form it took, would not be automatic and could be in either direction”. Previously the MPC had said this about the path for monetary policy in the event of “no deal”, but it now seems to want to introduce two-sided risk (i.e. more optionality) even in the event of an orderly exit.

Overall then, quite understandably and rightly, the Committee is waiting for more clarity on Brexit, which should come in the next three months. If there is an orderly exit from the EU, then we continue to expect the BoE to hike the bank rate by 25bp in May next year; that is, after a couple of months have passed post-March 2019 to confirm expectations of a recovery in business activity. Indeed, the MPC minutes today duly noted the pick-up in wage growth and the positive (but small) fiscal impact on growth from the Chancellor’s October Budget plans – the latter is estimated to add around 0.1 pp to real GDP growth on average over the next three years – which highlights that if it were not for Brexit the BoE would probably be hiking now. In the event of a disorderly exit, the MPC has been at pains to say that monetary policy could move in either direction depending on the move in the exchange rate and the balance of demand and supply, although in reality it would very likely cut rates – at least initially – to support demand.

The Office for National Statistics confirmed a preliminary estimate that Britain's economy grew by 0.6% in the third quarter from the previous three months.

That was the fastest increase since the end of 2016 as consumers spent heavily during the World Cup soccer tournament and a heat wave.

But more recent data suggested growth is slowing sharply ahead of Britain's exit from the European Union, and as the global economy weakens.

Real household disposable income was flat in the third quarter, the second weakest reading since the start of 2017.

Friday's ONS data showed inventories were their highest since the end of 2016, suggesting companies were stockpiling to avoid potential customs delays after Brexit.

Earlier on Friday, private-sector economic surveys showed the weakest consumer sentiment since 2013, and the lowest business morale since 2016's Brexit referendum, as well as the biggest drop in car production since 2009. is an independent macroeconomic consultancy with thousands of subscribers all over the world. We provide fundamental research to help our clients make better investing decisions. Our subscribers should expect to get access to:

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