It has been divulged that two members of the Bank of England have voted for an immediate cut – a surprise to markets. That said, the bank's new forecasts are not as dovish as expected. While a lot depends on Brexit, it is probably too early to be pencilling in policy easing just yet.
At face value, the Bank of England's latest monetary policy decision is more dovish than expected.
In a surprise move, two committee members voted for an immediate 25bp rate cut. Policymakers have also for the first time hinted at easing in their statement, suggesting that monetary policy may be needed to reinforce growth should Brexit uncertainty persist.
That suggests that the Bank is very unlikely to follow through with its signalled rate hikes anytime soon.
That being said, the Bank's Brexit assumption could easily change again but if one digs a little deeper, the Bank's latest report isn't quite as downbeat as the overarching guidance implies.
One surprising feature of the latest Bank of England projections is its decision to effectively assume that PM Johnson's Brexit deal will be ratified - taking the UK to a free-trade agreement in the longer term.
While this reflects the Bank's long-standing policy of basing forecasts on government policy, this will all depend on December's election. And while the polls suggest the Conservatives will gain a majority – giving PM Johnson the scope to get the deal ratified in Parliament - there is still a potential for big surprises when the UK goes to the polls next month.
Therefore, one cannot rule out another hung parliament, which could either prolong the Brexit uncertainty or alternatively see a Labour-led minority government begin organising a second Brexit referendum.
In other words, it's not unthinkable that markets might see another sizable change to the Bank's projections early next year, depending on who prevails at next month's election.
On another notes, the Bank's investment rebound may not materialise. The Bank has, as expected, downgraded its growth profile over the next three years, although this is largely accounted for by weaker global growth and a steeper yield curve.
On the contrary, the Bank is a little more optimistic about 2020 when it comes to investments, assuming the deal is ratified. Policymakers now expect investment to return to very modest growth in 2020 compared to the fairly sizable fall policymakers had predicted back in August.
In reality, a lot will depend on the length of the transition period. This standstill phase that is due to last until December of next year will almost certainly need to be extended to allow time for a new trading relationship to be agreed.
However, this will require the government to sign up to EU budget payments by June to unlock a two-year extension until 2022. That will be a tough price for PM Johnson to pay, and negotiations over this will undoubtedly be noisy.
While it is ultimately suspected that a longer transition is inevitable, until known for sure, firms will continue to tread carefully, faced with a possible risk of the UK leaving the EU's single market and customs union abruptly at the end of next year.
While 2020 is expected to be another uncertain year for the UK economy, it is probably still too early to be pencilling in rate cuts. While the Bank is now hinting more directly at possible easing, the fact that it is still formally projecting excess demand in its forecasts and keeping the door open to rate hikes in its statement, suggests policymakers are reluctant to follow the Fed and ECB into rate cuts just yet.
Disclaimer: This article was issued by Maria Fenech, Credit Analyst at Calamatta Cuschieri. For more information visit www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.