The Monetary Policy Committee of the BOE (Bank of England) has unanimously voted to keep the bank rate unchanged at 0.75%. At the monetary policy concluded as on September 18, 2019, the BOE highlighted that Brexit related fog hovering over the British economy are making UK economic data points more volatile, with Gross Domestic Product (GDP) contracting by 0.2 per cent during the second quarter of 2019 (Q2) and now expected to grow by 0.2 per cent in the third quarter of 2019 (Q3). The BOEâs monetary policy committee has also pointed out that the underlying growth has shrunk but was standing slightly in positive terrain and that a level of excess supply seems to have opened within companies. However, uncertainties related to Brexit could continue to put pressure on business investments, despite consumption growth remaining resilient, backed by continued growth in the real household income. Also, the ongoing global slowdown is weighing on exports. The government has earlier announced a substantial increase in departmental spending for 2020-21, which could push the UK's GDP by approximately 0.4% as per the MPC estimates, ceteris paribus.
The BOEâs Monetary Policy Committee sets the policy rate to meet the inflation target of 2% to sustain economic growth and jobs. At the BOEâs policy meeting that concluded on September 18, 2019, all members of the policy committee agreed to hold Bank rate at 0.75 per cent, and they also voted unanimously to maintain the stock of pound(Â£) non-financial investment-grade corporate bond purchases, supported by the issuance of Â£10bn central bank funds. Members also voted to retain the inventory of British government bond purchases, financed by the issuance of central bank reserves, at Â£435bn.
Since, previous policy rate meeting, the trade spat between the United States and China has aggravated, and growth outlook for the global economy has further dampened. Monetary policy seems to have failed to cope up with the ongoing slowdown in many large economies. However, in the United Kingdom, the timing and nature of Brexit have raised substantial volatility in Britain's asset prices, primarily in the Sterling Pound which had slumped significantly in the past couple of months against the basket of major currencies.
Recently the Office for National Statistics (ONS) reported that CPI inflation declined to 1.7% in August 2019 against 2.1% recorded in the July 2019 and is estimated to remain under 2% inflation target set by the BOE in the near term. The labour market seems to remain robust, with the unemployment rate remaining under 4% since the start of 2019. Also, the yearly pay growth has reinforced further to the topmost levels in over the past ten years. Unit wage cost growth has also improved to a degree above that consistent with meeting the inflation target set by BOE in the medium-term time span. However, the jobs market could deteriorate in coming times with the weakening of survey measures of employment growth.
Post, EU referendum that took place on July 23, 2016, for most of the time, the UK economy has been shrinking against the global growth which remained comparatively stable. However, recently heightened Brexit related headwinds and softened global growth economies led to the re-emergence of a margin of excess supply. Substantially heightened uncertainty fog over the nature of Brexit, meaning that the UK could go through a wide range of paths over many months to come.
Meanwhile, the Bank of England said that the appropriate response to address the future circumstances would largely depend upon the net effect of the Brexit on demand, supply and Pound exchange rates against the pool of major currencies.
However, it is mostly possible that near term political developments in the UK could lead to a further period of heightened uncertainties about the nature of EU withdrawal and the transitions, to Britain's future relationship with the EU bloc of 27 states. The longer it stretches, in the face of weakening global growth, it could lead to softened demand and increase in excess supply. In this scenario, the inflationary pressure generated domestically would be lowered.
In the case of disorderly Brexit or a no-deal Brexit, the currency exchange rates are going to nosedive again, that could lead to increased inflationary pressure in the UK economy and GDP growth could drag down further. The BOEâs monetary policy decision would need to adjust with the upwards inflationary pressure in the economy from the potential fall in the sterling pound value against the majors and slowdown in supply capacity, with downside pressure from any slowdown in demand. In these situations, the response of the monetary policy committee is to fix the challenges would not be automatic and could swing in both (increase or decrease in interest rates) direction.
On the same time in case of a smooth exit of Britain from the EU bloc, this could lead to an immediate recovery in the medium demand term, which could lead the price of goods and services up. Therefore, in this kind of situation, the members of MPC committee could consider increasing policy rates to absorb the excess liquidity to maintain the CPI inflation within the range of 2%, set by the UK's central bank.
Considering the ongoing turmoil in the British economy which is all set to leave the EU bloc as on October 31, 2019, it is no surprise that MPC members unanimously voted to kept the rates unchanged at 0.75%, but the stance was more dovish with the statement-making reference to shrinking inflation.
However, the future stance of Bank of England over policy rates is tough to predict at the present level, as fear of a no-deal has jolted every stakeholder of the UK, and consequences of no-deal Brexit being worse than earlier claimed by the BOE chief, material risks for economic disruption remains high.