Bank Of England Likely To Hold Rates Steady Ahead Of Pre-Christmas General Election

Bank of England (BoE), the apex bank of the United Kingdom seems to hold interest rate amid a global trend towards lower interest rates in the MPC meeting on November 07, 2019. However, investors will keep an eye on any policymaker who going contra might vote to stimulate the UK's contracting economy.

In the recent Monetary Policy Committee (MPC) meeting held on September 18, 2019, the MPC voted unanimously to keep the Bank Rate unchanged at 0.75%. As volatility is at its peak in the UK, particularly due to Brexit related uncertainties, which has been denting the British economy, with Gross Domestic Product (GDP) declining 0.2% in the second quarter of 2019 (Q22019) and estimated to grow by 0.2% in the coming quarter.

The long-standing trade rifts between the two large economies of the world -US and China- has also negatively impacted the global outlook and growth has been weighed down across the world. Â Also, it is highly possible that December 12, domestic snap election results could entrench political uncertainty in the UK, that will further dent the British economy in the broader sense.

On December 12, 2019, Britain will finally witness an election, now it’s a dilemma for PM Johnson, as since beginning of his tenure as British PM, he kept on promising to deliver Brexit at any cost by October 31, 2019, he risks not only further withdrawal delay but chances of losing Brexit altogether. Although, right now he is enjoying decent poll leads, but a lot can turn against him during election, similar to what happened with Theresa May. A potential thumping majority for Boris Johnson-led government will widely be considered as most market friendly and is likely to have favourable impacts on the London Stock Exchange-traded mid-cap stocks and could weigh on US Dollar dominated blue chip stocks as well.

So far BoE has boycotted the prevailing trend started by US Federal Reserve and European Central bank to reduce main interest rate in the wake of slowing global growth and triggered by the trade war between the United States and China.

The outlook for BoE Chief Mark Carney and MPC members is gloomy not only because of increased uncertainty over Brexit but also because of the UK’s snap election, in which the two front contesting parties are promising for very high public spending. However, in their previous MPC meeting, the BoE moderated their position and communicated that any future interest rate hike would first require an improvement in the global growth as well as clarity upon the UK’s withdrawal from the EU bloc.

However, a section of economists has predicted that BoE will consider a rate cut at some point in 2020, and capital markets seem to have already discounted approximately 55% chance of a potential 0.25% rate cut in 2020.

How the change in interest rate affect the economy

Bank rate or Interest rate is a very significant single rate in the UK. BoE's MPC sets bank rate, and they have to be very pedantic to meet the UK's inflation target of 2%.

Bank rate is the rate at which commercial banks get paid for the deposits they hold with Bank of England, and it also influences that rate those commercial banks charge people for borrowing and savings.

A change in interest rate affects how much people spend and how much their spend influences on the scenario of how things will cost. Therefore, if interest rate changes, it can influence prices and inflation in Britain, BoE targets to keep inflation at 2%, which has been benchmarked by the British government.

If you are borrowing and saving, then how the change in Bank rate could affect you?

If bank rate declines and if you have a loan or mortgage, then your interest payments get cheaper while on the same time if you have your savings with banks, you will get paid less interest income. In a falling interest rate scenario, it helps household and businesses to borrow more but is less rewarding for savings.

Therefore, if BoE lowers interest rate, this will tend to strengthen spending, and if they hike interest rate, it will soften the spending. So, to match with the benchmark inflation target of 2%, they need to assess how much people want to spend and how much they want to save with the present interest rates.

For instance, if people reduce spending beyond a threshold, it will affect businesses and cost people as they may lose their jobs and to prevent job losses BoE could intervene and slash interest rates to support spending.

As what happened during the 2008 Financial Crisis, spending plummeted substantially and resulted into many losing their jobs, and then BoE intervened, slashing Bank rate to a considerably low levels, to support spending and protect jobs.

However, over the past few years, the British economy has required interest rates to stay very low as they recovered from the 2008 financial crisis, however, the situations are turning now.

Conclusion

In August 2019, CPI inflation of the country fell to 1.7%, from 2.1% in July, and is estimated to remain below the 2% target inflation level in the near term. The job market appears to remain tight, with the unemployment rate remaining just under four per cent since the beginning of this year. Annual pay rise has increased further to the highest rate in over last ten years. Unit wage cost expansion has also strengthened, to a level more than what was consistent with meeting the inflation target in the medium term. The labour market does not look to be tightening further; with official and survey measures of employment growth softening too. However, in this November 07, MPC meeting, a policy decision will weigh more on Pre-Christmas General Election and its potential impacts, so that we expect the BoE is most likely to keep interest rates unchanged at 0.75% this time too.