Bank of England to stay on hold as Brexit saga plays on

Bank of England to stay on hold as Brexit saga plays on

By William Schomberg

LONDON (Reuters) – The Bank of England will weigh up the Brexit outlook on Thursday after last week’s election raised hopes of a smoother path out of the European Union, only for Prime Minister Boris Johnson to revive fears of a chaotic exit.

The BoE will say at 1200 GMT that it is keeping interest rates at 0.75%, all 69 economists polled by Reuters predicted.

Most of them expect a repeat of last month’s 7-2 vote by policymakers in favor of no change, when only Michael Saunders and Jonathan Haskel backed a cut.

But there are bigger differences over what the BoE is likely to do in 2020 – lower rates, keep them on hold, or possibly even resume its long-delayed plan to raise them, depending on how the Brexit saga plays out.

“It’s pretty murky. Things could be very uncertain in the second half of 2020,” James Smith, an economist with ING, said.

Another big unresolved question is who will succeed Mark Carney after his scheduled departure on Jan. 31.

The uncertainty about Britain’s departure from the European Union prevented Carney and his colleagues from following the lead of the U.S. Federal Reserve and raising rates in 2018.

It was then sidelined from a shift toward lower rates as other central banks, including the Fed and the European Central Bank, moved to counter the impact of the U.S.-China trade row on their economies.

Now, 3-1/2 years after British voters decided to leave the EU, there is finally some clarity on Brexit: Johnson’s big majority in parliament ensures it will happen on Jan. 31, followed by a no-change transition period.

But Johnson punctured the post-election euphoria in British financial markets on Tuesday by proposing a law to rule out any extension of the transition beyond the end of 2020.

That raised the prospect of an economically damaging Brexit if a long-term trade agreement has not been struck by then.

“As plenty of Brexit uncertainty still surrounds the 2020 outlook, we think the BoE is likely to retain its dovish bias into next year,” Allan Monks, an economist with JP Morgan, said.

“Even if it holds rates, as we currently expect, the government’s intention to legislate against a transition extension serves to highlight the risk of a cliff edge in 2021.”

Christian Schulz, an economist with Citi, predicted a BoE rate cut in August followed by more cuts and a resumption of bond-buying in 2021 when Britain risked falling into recession because of Johnson’s new Brexit gamble.

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Source : Reuters Link

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