Weekly update - Oh yes it is, oh no it's not!
As we near the pantomime season politics takes centre stage as both main parties continue with their pre-election giveaways; austerity as a policy is well and truly over. What it is replaced with depends on who either wins outright or has the most influence in a ruling coalition. Markets at the moment appear reasonably sanguine about the outcome. If the Conservatives maintain their current lead this should be enough for a small majority. However the Conservatives were further ahead at this point in 2017 and thereafter the polls narrowed sharply; should history repeat itself then markets will begin to get a bit more nervous.
At this month’s Monetary Policy Committee’s meeting, which concluded on 7th November, the vote was 7-2 to keep the Bank Rate at 0.75%. The market consensus expected a unanimous no-change decision but Michael Saunders and Jonathan Haskell both voted to reduce Bank Rate to 0.50%.
The MPC’s forecasts are now based on the assumption of an orderly transition to a “deep free trade agreement” between the UK and EU, not the close relationship envisaged by the previous Brexit deal. The MPC still expects the reduction in Brexit uncertainty and fiscal stimulus to boost the rate of GDP growth next year. However its forecast for GDP growth next year remains at 1.25%. Looking further out, the 2021 forecast has been reduced from 2.25% to 1.75%. The reason given for this change is the ‘inferior Brexit end state’ it now envisages.
The MPC also expects CPI inflation to modestly undershoot the 2% target over the next two years. So with a reduction in growth forecasts, below expectation inflation and two MPC members voting for a rate cut, the chances have increased that the next move in interest rates will be down.
Much will depend on the global picture. The US has now cut official rates three times this year although the Fed chairman has indicated that the committee is now comfortable with current interest rates (unlike the President) and so things are on pause. If the long-awaited trade deal with China is signed then it could be that the global picture in 2020 is a bit brighter.
Until the outcome of the General Election is known UK Monetary Policy is on hold. Once the new government is in place, the next move in interest rates will be data dependent. Whilst two members have voted for a cut; three members voted to raise interest rates in June 2017 and that rise never materialised. So the committee can change direction, and of course it is likely that the Bank of England will have a new Governor in early 2020.
Have a good week.