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What changed in the Monetary Policy Report?

08 November 2019

The Bank of England's (BoE) Quarterly Inflation Report has been revamped as the 'Monetary Policy Report'; however, with the exception of a new front cover, the report appears to remain largely unchanged. This begs the question, amidst the ongoing political turmoil in the UK, have we seen any significant changes at the BoE?

As expected, at this week's Monetary Policy Committee (MPC) meeting, the BoE held rates and kept its balance sheet unchanged. However, perhaps more unexpectedly, two members of the MPC voted for a rate cut in reaction to the weakness of the economy. This caused surprise to some investors, and consequently implied that the probability of a rate cut is now over 50% for August's meeting next year.

The BoE's expectation is for an eventual rate rise but cannot rule out the likelihood of a rate cut if needed. The BoE's comment on the path of rates was as follows:

"If global growth fails to stabilise or if Brexit uncertainties remain entrenched, monetary policy may need to reinforce the expected recovery in UK GDP growth and inflation. Further ahead, provided these risks do not materialise and the economy recovers broadly in line with the MPC’s latest projections, some modest tightening of policy, at a gradual pace and to a limited extent, may be needed to maintain inflation sustainably at the target." (Monetary Policy Report - November 2019)

The biggest change is the expected path of Brexit; rather than a smooth transition over a long period of time, the BoE have taken on board the latest Withdrawal Agreement and Political Declaration that significantly reduce the chance of a no-deal Brexit occurring. The MPC's projections are conditioned on the assumption that the UK moves to a "deep free trade agreement with the European Union". They see these developments as likely to remove some of the uncertainty that has been facing business and households.

The forthcoming election is not mentioned in the report, Mark Carney attempted to avoid the political sphere and it was first mentioned seventeen minutes into the press conference. Despite a more positive view on the Brexit outcome, the central bank is reducing its growth forecast for the future due to a dreary global outlook. The central expectation for 2021 has been revised from 2.2% in the August report to 1.8% today. The main reason for this downbeat view is slowing growth globally and the effects of growing protectionism, as discussed in the Trade Protectionism and the Global Outlook chapter of the Monetary Policy Report.

There was little reaction in markets with the pound marginally lower after the announcement. 

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