Bank of England Keeps Rates Steady Amid Positive Macro Data

The Bank of England has left its policy framework unchanged after macroeconomic conditions demonstrated unexpected, steady improvement over the second half of the summer.

Kristian Rouz – The Bank of England (BOE) kept its base borrowing costs unchanged, with its bond-purchasing program intact, falling in line with earlier predictions of no policy action on the regulator’s part this Thursday.

The abundant, positive recent macroeconomic signals have provided enough investor confidence for the economy to maintain its current pace of expansion, while the current level of base interest rates, at 0.25 percent, provides substantial post-Brexit stimulus; it's been deemed enough to prevent short-term risks. Nonetheless, in a move to provide firmer sentiment to the domestic market, the BOE said the rate might be cut to zero in the future, should any negative developments be observed.

Having cut its base interest rate in August from 0.5pc to 0.25pc, its all-time lowest in the 322 years it has existed, the BOE kept borrowing costs unchanged on Thursday, with policymakers having voted 9-0 in favor of the decision. The asset purchase program, which was expanded in August to £435 bln in government bond purchases and up to £10 bln in private debt to be bought out by the BOE over the medium-term, was also left unchanged.

Post-Brexit uncertainty had suggested the UK’s economy would slide into a recession and disinflation due to the dominant perception that a dearth of investment and weak economic activity would accompany the UK’s separation from the continent. However, recent macro data from the Office for National Statistics (ONS) has indicated a pickup in British economy rather than a decline, resulting in the BOE seeing no point in loosening monetary conditions further when even August’s expansion of stimulus was enacted largely as a precautionary measure.

“They are cautiously optimistic,” Victoria Clarke of the South African wealth manager Investec said. “Provided the data shows modest growth in the third quarter overall, they’d probably be happy to cut rates again. If it starts to pick up even more then they’ll probably take a pause and wait and see for another quarter or so.”

The BOE’s Monetary Policy Committee (MPC), which is responsible for the decisions on rates and stimuli, said their “contours of the economic outlook” had not changed since the last policy meeting, even though the data provide a brighter outlook. The MPC said short-term data turned out to be stronger than anticipated, while a longer-term outlook might be more complex, hence the regulator’s caution.

In August, the UK’s manufacturing, services and composite Purchasing Managers’ Indices (PMIs) all rebounded above the reading of 50 (the threshold between contraction/expansion). In July, all three had hit rock bottom at around about 48 amid the Brexit panic, but in August all three approached a reading of 54. The 6-point surge was dictated by the weaker pound, which boosted the competitiveness of national economy, job market improvements, a pickup in consumption, as well as the Theresa May cabinet’s unveiled plan to boost government spending aimed at economic and infrastructure development.

“The committee would closely monitor changes in asset prices and in interest rates facing households and firms and their effect on economic activity,” the MPC said.

The committee expects inflation to accelerate from 0.6 percent in August to a target of 2 percent in the first half of 2017, stemming from the attenuating “unusually large drags from energy and food prices”, pushing overall economic growth up as well.

Meanwhile, the cabinet is expected to provide details on their fiscal stimulus planning on November 23. The budget statement is scheduled to be delivered by the Exchequer. The overall expectations are the government would postpone their plans of turning fiscsal deficit into a surplus by a couple of years and boost spending in order to modernize and realign the economy with the new reality.