MPC leaves Monetary Policy unchanged amidst concerns at heightened risk of No Deal Brexit
Minutes from the Bank of England’s Monetary Policy Committee (MPC) meeting ending 19th June 2019 reported unanimous agreement across Committee members to maintain no change to monetary policy. Bank Rate has been maintained at 0.75% while the stock of sterling non-financial investment-grade corporate bond purchases were maintained at £10 billion, financed by the issuance of central bank reserves.
The MPC sets monetary policy to meet a 2% inflation target in a way that helps to sustain growth and employment in the UK economy. Recent projections from the May Inflation report have assumed a smooth adjustment to the UK’s new trading relationship with the European Union following the 2016 vote to leave. Such projections have included an assumption that Bank Rate will reach 1% by the end of the forecast period to maintain inflation at its target level.
CPI Inflation was 2.0% in May 2019 and is expected to fall below this target level later in 2019 as energy prices fall globally. Employment levels remain strong with a tight labour market, in line with May projections. GDP growth has fallen below projected levels for 2019 as a whole as we reach the half-year stage, largely explained as being due to ongoing Brexit uncertainties delaying corporate investment alongside subdued global growth. While domestic household consumption growth has been relatively strong, the first half of 2019 has underperformed relative to the first half of 2018.
On an international level, trade tensions have deepened particularly in the ongoing trade war between the US and China. Domestically, the resignation of Prime Minister Theresa May has sparked a leadership contest that has raised concerns over the prospect of a “No Deal” hard Brexit as the country moves towards the 31st October 2019 deadline. This has weakened the sterling exchange rate and exerted downward pressure on UK forward interest rates.
The European Central Bank and Federal Reserve have indicated a willingness to consider lowering interest rates unless global data improves, but members of the MPC judged that given the above, it remains appropriate for monetary policy in the UK to continue unchanged. The minutes released remain consistent with previous guidance that future rate rises may be required if economic data continues to support key projections over the forecast horizon.
Minutes from the next MPC meeting will be released on 1st August 2019 and we’ll keep you updated on key economic updates in the interim period, with the most notable being the appointment of the next Prime Minister of the United Kingdom and Northern Ireland.