Press release

19 Dec 2019 London, GB

MPC remains split 7-2 over need for lower interest rates

The Monetary Policy Committee remained split 7-2 to keep interest rates at 0.75% at their December meeting.

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  • The Monetary Policy Committee remained split 7-2 to keep interest rates at 0.75% at their December meeting. Michael Saunders and Jonathan Haskel took the view that the economy’s recent performance, modest but rising spare capacity, slowing employment growth, subdued core inflation and downside risks to the outlook from the global economy and Brexit uncertainties warranted extra stimulus now to see a sustained return of inflation to its 2.0% target.
  • However, no other MPC member felt compelled to join them for now at least – preferring to adopt a “wait and see” stance. The MPC considered that the outlook for GDP growth in the first half of 2020 would “depend significantly on how uncertainty evolved. They believed economic data since their November meeting had been broadly in line with expectations, and it was too soon to judge how the economy would be affected by the General Election result and also some signs of global growth stabilising as well as some de-escalation of US-China trade tensions.
  • However, the minutes indicated that the other seven MPC members would be prepared to cut interest rates if downside risks materialised – noting that if Brexit uncertainties become entrenched or global growth fails to stabilise, monetary policy may need to reinforce the expected recovery in UK growth and inflation.
  • Further out, the MPC maintained the softer view that they had adopted in November that if the UK economy develops in line with the Bank of England’s projections, some modest tightening of monetary policy might be needed to maintain inflation sustainably at its target rate. Up until November, the MPC had adopted the view that a gradual and limited increase in interest rates would likely be needed if there is a “smooth” UK departure from the EU and there is some recovery in global growth.
  • For now, we just about maintain the view that the Bank of England is most likely to keep interest rates at 0.75% through 2020. However, it is a close call and there is clearly a real possibility that there could be a 25 basis point interest rate cut to 0.50% in 2020. 
  • If the UK economy fails to show clear signs of picking up in the early months of 2020, pressure will clearly mount on the Bank of England to trim interest rates to provide support. Pressure for lower interest rates could also mount if the economy continues to be hampered by concerns over the UK’s longer-term relationship with the EU and what will happen at the end of 2020 when the transition arrangement will be due to end.
  • We expect the Bank of England to edge interest rates up by 50 in 2021, (in two 25 basis point hikes) taking them up to 1.25%. This is based on the expectation that growth will be firmer around 1.6%, the labour market will see modest improvement and inflation will reach 2.0% during the year.
  • The interest rate outlook could be influenced by the imminent appointment of the new Bank of England Governor to replace Mark Carney. While the new Governor has just one out of nine votes on the MPC, he or she obviously can have a significant impact on the MPC’s deliberations.   

Howard Archer, chief economic advisor to the EY ITEM Club, comments:

“No real surprise as the Bank of England’s Monetary Policy Committee (MPC) kept interest rates unchanged at 0.75% at their December meeting.

“There was also an unchanged split of 7-2 within the MPC for unchanged interest rates. Michael Saunders and Jonathan Haskel maintained their view that an immediate 25 basis point cut to 0.50% was justified. They had switched to this view in November, which had marked the first split MPC vote on interest rates since June 2018.

“Saunders and Haskel maintained the view that the economy’s recent performance, modest but rising spare capacity, slowing employment growth, subdued core inflation and downside risks to the outlook from the global economy and Brexit uncertainties warranted extra stimulus now to see a sustained return of inflation to its 2.0% target.

“The other seven MPC members were in “wait and see” mode, taking the view that interest rates of 0.75% currently remain appropriate as UK data had recently been broadly in line with expectations and that it was too soon to judge how the economy would be affected by the General Election result and also some signs of global growth stabilising as well as some de-escalation of US-China trade tensions. With regards to the Conservatives gaining a clear majority in the General Election, the Bank of England observed: “There is no evidence yet about the extent to which policy uncertainties among companies and households have declined.”

“The minutes indicated that the other seven MPC members would be prepared to cut interest rates if downside risks materialised – noting that if Brexit uncertainties become entrenched or global growth fails to stabilise, monetary policy may need to reinforce the expected recovery in UK growth and inflation.

“Despite considering economic data had been broadly in line with expectations since their November meeting, the MPC reduced their expectation of UK GDP growth in the fourth quarter to 0.1% quarter-on-quarter from the 0.2% quarter-on-quarter rate anticipated in November. It is also notable that third quarter GDP growth of 0.3% quarter-on-quarter was also less than the 0.4% quarter-on-quarter rate estimated by the Bank of England in November.

“The MPC considered that the outlook for GDP growth in the first half of 2020 would “depend significantly on how uncertainty evolved.”  

“For the time being, the MPC maintained the view that growth would pick up from early 2020 due to easing in Brexit uncertainty, higher government spending and an improving global economic outlook.

“The MPC observed that there continue to be signs that the labour market is loosening although it remains tight. They also note that pay growth has slowed from peak levels around July although unit costs are still rising at a rate above that consistent with meeting the inflation target. The MPC expect private sector earnings growth to remain around 3½% - although they see some downside risk to this. 

“While the Bank of England expect consumer price inflation (1.5% in November) to fall as low as 1¼% by spring due to temporary effects relating to regulated energy and water prices as well as sterling’s recent strengthening, the MPC maintained the view that it would rise slightly above its 2% target by the end of the forecast horizon.

“The MPC maintained the view that if the UK economy develops in line with the Bank of England’s projections, some modest tightening of monetary policy might be needed to maintain inflation sustainably at its target rate. The MPC had originally switched to this view at their November meeting which had represented a dilution of their previous expectation that interest rates would need to rise over the medium term. Up until November and for an extended period, the MPC’s mantra had been that if there is a “smooth” UK departure from the EU, the UK would likely need a gradual and limited increase in interest rates to sustainably meet its 2.0% inflation target. This also assumed there is some recovery in global growth.

Interest rate outlook

“For now, we just about maintain the view that the Bank of England is most likely to keep interest rates at 0.75% through 2020. However, it is a close call and there is clearly a very real possibility that there could be a 25 basis point interest rate cut to 0.50% in 2020. 

“If the UK economy fails to show clear signs of picking up in the early months of 2020, pressure will clearly mount on the Bank of England to trim interest rates to provide support.

“Pressure for lower interest rates could also mount if the economy continues to be hampered by concerns over the UK’s longer-term relationship with the EU and what will happen at the end of 2020 when the transition arrangement will be due to end.

“Meanwhile, consumer price inflation looks likely to stay below the Bank of England’s 2.0% target rate through 2020, thereby facilitating an interest rate cut by the Bank of England.

“We expect the Bank of England to edge interest rates up by 50 raise interest rates in 2021 (in two 25 basis point hikes) taking them up to 1.25%. This is based on the expectation that growth will be firmer around 1.6%, the labour market will see modest improvement and inflation will reach 2.0% during the year.   

“The interest rate outlook could be influenced by the imminent appointment of the new Bank of England Governor to replace Mark Carney. While the new Governor has just one out of nine votes on the MPC, he or she obviously can have a significant impact on the MPC’s deliberations.”