Press release

30 Jan 2020 London, GB

Bank of England keeps interest rates at 0.75% after unchanged 7-2 MPC split

The Bank of England kept interest rates unchanged at 0.75% at the January Monetary Policy Committee meeting today.

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  • The Bank of England kept interest rates unchanged at 0.75% at the January Monetary Policy Committee meeting today. The MPC majority for keeping interest rates at 0.75% rather than cut them to 0.50% was 7:2, as had been the case in December. There had been considerable speculation that even if the Bank of England did not cut interest rates at the January MPC meeting, more MPC members would favour looser monetary policy.
  • No MPC member felt compelled to join Michael Saunders and Jonathan Haskel for an immediate interest rate cut. Despite some recent dovish comments earlier in January by MPC members (Silvana Tenreyro, Gertjan Vlieghe and Mark Carney) indicating that they could favour a near-term interest rate cut if the economy failed to quickly show improvement after the election, they clearly decided that there had been enough evidence of this to sit tight for now at least.
  • The MPC also noted that global growth had appeared to stabilise and that there had been a reduction in trade tensions. The Bank considered it was too early to judge the impact of the Coronavirus. The Bank of England also noted possible support to UK growth from the Budget.
  • However, the MPC has kept the door wide open to a future interest rate cut as the minutes of the meeting observed that “policy may need to reinforce the expected recovery in UK GDP growth should the more positive signals from recent indicators of global and domestic activity not be sustained or should indicators of domestic prices remain relatively weak.”
  • Consequently, an interest rate cut to 0.50% at the March MPC meeting currently remains very much in play. Another factor that could influence the March interest rate decision is that it will be the first MPC meeting after Andrew Bailey replaces Mark Carney as Governor.
  • On the other hand, the minutes note that if the economy recovers broadly in line with the MPC’s latest projections, some modest tightening of policy might be needed to maintain inflation sustainably at the target. It is notable that the MPC no longer refers to the potential tightening of monetary policy being limited and gradual as had long been its mantra.
  • The Bank of England cut its GDP growth forecasts to 0.8% (from 1.2%) in 2020, 1.4% (from 1.8%) in 2021 and to 1.7% (from 2.0%) in 2022. This disappointingly reflected the Bank downgrading its potential growth supply side for the UK economy to just 1.1% over the next three years. Consequently, spare capacity is used up and consumer price inflation is seen getting up to 2.0% around the end of 2021 and is seen marginally above target at 2.15% in the fourth quarter of 2022.  
  • While we certainly would not rule out an interest rate cut in March, we suspect the likelihood of a rate cut reduction this year will recede as we expect economic activity to become healthier.
  • Consequently, we believe that it is more likely than not that interest rates will remain at 0.75% through 2020.
  • We expect the Bank of England to start edging interest rates up around mid-2021. This is based on the expectation that growth will be firmer around 1.7%, the labour market will see modest improvement and inflation will reach 2.0% during the year. We are more optimistic than the Bank of England on growth prospects.

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

“The Bank of England’s interest rate call at the January MPC meeting had looked to be the closest to call for a very long time. At one time, the markets had been pricing in a 70% chance of a cut from 0.75% to 0.50% although by the time of the meeting it was around 50%:50%.

“In the end the Bank of England kept interest rates unchanged at 0.75%. Perhaps more surprisingly, the split within the MPC for keeping interest rates at 0.75% rather than cutting them to 0.50% was 7:2 – unchanged from the December meeting. There had been considerable speculation that even if the Bank of England did not cut interest rates at the January MPC meeting, more MPC members would favour looser monetary policy.

“No MPC member felt compelled to join Michael Saunders and Jonathan Haskel for an immediate interest rate cut. Despite some recent dovish comments earlier in January by MPC members (Silvana Tenreyro, Gertjan Vlieghe and Mark Carney) indicating that they could favour a near-term interest rate cut if the economy failed to quickly show improvement after the election, they clearly decided that there had been enough evidence of this to sit tight for now at least.

“The MPC also noted that global growth had appeared to stabilise and that there had been a reduction in trade tensions. The Bank considered it was too early to judge the impact of the Coronavirus. The Bank of England also noted possible support to UK growth from the budget.

“The Bank of England estimated that GDP growth stagnated in the fourth quarter of 2019. It considered that near-term uncertainties facing businesses and households have receded following the election and the UK leaving the EU on Friday with a deal. It observed that surveys of business activity have picked up, quite a lot in some cases, and investment intentions appear to have recovered. Housing market indicators have strengthened and consumer confidence has increased slightly.

“Consequently, the Bank of England expects GDP growth of 0.2% quarter-on-quarter in the first quarter of 2020 (which we suspect may be on the pessimistic side). Further out, the Bank of England sees UK growth supported by a pickup in global activity, a further decline in Brexit uncertainties and the Government’s announced spending measures. Business investment growth is projected to recover gradually, while household consumption growth also picks up. Net trade is expected to detract from GDP growth in 2021 and 2022.

“However, the MPC has kept the door wide open to a future interest rate cut – and very possibly in the near term – as the minutes of the meeting observed that they will closely monitor the extent to which these early indications of an improved outlook are sustained, and follow through to the hard data on domestic activity in coming months and that “Policy may need to reinforce the expected recovery in UK GDP growth should the more positive signals from recent indicators of global and domestic activity not be sustained or should indicators of domestic prices remain relatively weak.”

“Mark Carney further observed in his press conference that “these are early days. It is less of a case of so far, so good, than so far, good enough. It will be important for the hard data on activity to follow through on the recent pick-up in the surveys, and for domestic price inflation to strengthen."

“On the other hand, the minutes note that if the economy recovers broadly in line with the MPC’s latest projections, some modest tightening of policy might be needed to maintain inflation sustainably at the target. It is notable that the MPC no longer refers to the potential tightening of monetary policy being limited and gradual as had long been its mantra.

GDP growth forecasts significantly downgraded but reduced supply dide potential means inflation picks up

“The Bank of England cut its UK GDP growth forecasts to 0.8% (from 1.2%) in 2020, 1.4% (from 1.8%) in 2021 and to 1.7% (from 2.0%) in 2022.

“This disappointingly reflected the Bank downgrading its potential growth supply side for the UK economy to just 1.1% over the next three years. This is the consequence of a repeated poor productivity performance, weak business investment (hampered by Brexit uncertainties and planning), lower immigration and increased trade frictions from the start of 2021 even though it assumes the UK will reach a deep trade agreement with the EU.  

“Consequently, while the Bank of England considers that there is currently overall slack in the economy of around 0.5% of GDP, it sees this disappearing in a year’s time and excess demand of 0.75% in three years’ time.

“Consequently, consumer price inflation (1.3% in December) is now seen bottoming out at 1.24% (instead of 1.11%) in the third quarter of 2020 and then heading gradually up to 1.43% in the fourth quarter of 2020 and to 1.99% in the fourth quarter of 2021 – in line with the Bank of England’s 2.0% target. Inflation is seen moving marginally above target at 2.07% in the seconds quarter of 2022 and being slightly further above it at 2.15% in the fourth quarter of 2022 and the first quarter of 2023.

“Annual earnings growth (which hit an 11-year high of 3.9% in the three months to July before moderating to 3.2% in the three months to November) is seen averaging 3.25% in 2020 (as in the December forecast), rising gradually to 3.50% (trimmed from 3.75%) in 2021 and 3.75% (unchanged) in 2022.

“The Bank’s forecasts were based on prevailing market expectations that Base rate would be cut to 0.50% during the first quarter of 2020 and then essentially stay there to the first quarter of 2023 when it was seen inching up.”