The Bank of England does not have the easiest task in conducting monetary policy, because it still has to wait for the Brexit issue to unfold, which has been postponed again. This, in turn, increases the impatience among members of the Bank of England's monetary policy committee.
If there were no uncertainty around Brexit, interest rates in the UK would probably be higher than the current 0.75 percent and the British pound could be definitely stronger. During yesterday's decision (November 7), the Bank of England kept interest rates unchanged, but surprisingly, two of the nine members of the Monetary Policy Committee unexpectedly voted for an immediate rate cut. A statement from BOE (Bank of England) says that the monetary policy easing may be necessary if the risk of hard Brexit increases or global risk increases.
Consequently, the chances for a cut in BOE rates next year have increased in the money market. The probability of interest rate cuts by the end of 2020 increased to 76 percent, which shows that market participants are very confident in easing monetary policy in the UK. Nevertheless, in its statement, the Monetary Policy Committee indicated the possibility of acting in two directions depending on the further development of the situation.
The Committee will closely monitor the response of companies and households to Brexit development, as well as prospects for a revival of global growth. If global growth does not stabilize or if the uncertainty of Brexit persists, monetary policy may require strengthening the expected recovery of GDP growth and inflation in the UK. If these threats do not materialize and the economy returns to normal according to the Committee's latest forecasts, some moderate tightening of monetary policy, at a gradual pace and to a limited extent, may be necessary to keep inflation steady - the statement said.
The latest macroeconomic projections of the Bank of England assume GDP growth in Q4 this year by 1 percent, in Q4 2020 by 1.6 percent, a year later by 1.8 percent and in Q4 2022 GDP growth at 2.1 percent. Inflation is expected to return to its target at 2 percent in Q4 2021. Earlier it could be near 1.5 percent - according to the latest BOE projections.
For the British pound, in turn, the most important event will be the upcoming elections next month (12 December) in Great Britain. The outcome of Brexit and the pace of work on the way Britain exits the European Union may depend on their result. Until then, investors, as well as the Bank of England, may need to be patient before making key decisions.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal Opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
65% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.