Announcing its decision to keep rates steady at 0.25% and the QE presses printing, BoE governor, Mark Carney highlighted the fact that the monetary policy committee now had a “neutral bias” in terms of monetary policy.
He said: “Monetary policy can respond, in either direction, to changes to the economic outlook as they unfold to ensure a sustainable return of inflation to the 2% target.”
This marks a shift from the announcement made at the release of the August inflation report where the MPC indicated that most members expected make a further cut to rates sometime this year.
The reason for this shift has been, the Bank said, a “materially better-than-expected” performance from the economy and the growing inflationary pressures that come with it. Not only was the preliminary estimate of Q3 GDP better than anticipated, the near-term outlook is stronger than expected as is the level of household spending.
However, while it upgraded its near-term GDP growth forecast to 2.2% for 2016 and 1.4% for 2017, it has also downgraded its expectations for growth in 2018/9, reflecting the ongoing uncertainty the Bank has about the impact of Brexit.
According to Investec, while the rationale for the decision to revise higher the short term growth and lower the longer term estimates appears to be an assumption that Brexit-related uncertainty effects will be sustained for longer, it pointed out that “MPC has not signalled a change in its view of the political dynamics underlying Brexit, so on one level, the extent of this growth downgrade is a little puzzling.”
During the Q&A portion of the press conference, Carney was at pains to point out that the Bank has not changed its expectations about the type of Brexit the UK might undergo. “The assumptions we have used in November are the same ones we have been using and are a weighted average of a variety of outcomes,” he said, but he added there remains a great deal of uncertainty – especially following the legal actions earlier in the day.
When asked his view of the High Court’s ruling that MPs must have a say in any decision to trigger Article 50 of the Lisbon Treaty and thus actually start the clock on Brexit, Carney said it was an “example of the uncertainty that is going to characterise this process”.
“It is far too soon to make a judgement on exactly what form Brexit will take. The reason we have a slightly faster adjustment to that end state now, however, is because we are more informed about the relative pace of adjustment for businesses that are affected.”
