This month, the Bank of England's Monetary Policy Committee (MPC) meeting coincided with the release of their quarterly Inflation Report. It had been suggested that one member of the Committee could vote for a rate rise, however the unanimous decision was made to hold interest rates at 0.75%. Since publishing the Inflation Report in February, the Brexit process has been delayed and the Bank of England has experienced a change in its outlook.
In the first quarter, the UK GDP was ahead of the MPCs expectations. This was largely due to the build-up in inventories ahead of the Brexit deadline in March. The MPC had factored in a slight boost from this side of the Channel, but did not account for the ten-year high lift in exports as inventories also increased on the continent. As inventories unwind over the coming months, this will have a negative effect on the second quarter. However, the Bank of England has raised 2019 growth expectations on the whole from 1.2% to 1.5%, which appears to be driven by reduced trade tensions and an ease in monetary policy in the US and China. The forecast continues to be predicated on a smooth Brexit outcome. Whilst economic growth and business investment in the UK remains sluggish, hiring continues and the unemployment rate is expected to fall as low as 3.5% later this year.
With predictions based on a smooth Brexit, the MPC note that the market expectation is for a single rate rise in the next three years, which may be on the low side. When questioned on what this was, Bank of England Governor Mark Carney said it was between a customs union and a free trade agreement but the devil was in the detail. The MPC holds that a no deal Brexit, whilst the default position, was not likely with the UK Parliament voting against it and the 27 remaining EU countries expressing a wish to avoid it. Once again, the MPC repeat the mantra that tightening will be at a "gradual pace and to a limited extent".
On balance, it is a marginally positive view of the UK economy relative to the previous Inflation Report. However with Brexit uncertainty holding things back, markets were unchanged following the announcement. In the absence of clarity on Brexit, it will be individual company results and international trade developments which are likely to be the market focus over the short term.
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