After last week’s “as you were” interest rate statement from the Bank of England, Oliver Blackbourn, multi-asset portfolio manager at Janus Henderson Investors, told IFA Magazine a little more about the background behind the decision.
The Bank of England (BoE) again left interest rates unchanged at 0.75%, despite the headwinds buffeting the UK economy. The Bank didn’t follow the Federal Reserve and European Central Bank in turning more dovish, though economic growth is expected to be weaker than previously forecast this year and next. The Bank appears to be caught between a weaker near-term growth outlook and expectations that inflation will rise above the 2% target over the next three years. As markets are clearly pricing in interest rate cuts, the Bank is forced to expect rising inflation over the forecast period, despite their own indications that they intend to raise interest rates.
Despite recent commentary from UK government ministers, the Bank of England continued with its assumption of a smooth Brexit transition. The Bank continues to find itself entangled in a web of planning for ‘no deal’ but being unable to use this as an assumption in its own forecasts. This is creating significant inconsistencies between its outlook and the market forecasts that feed into it. Some Monetary Policy Committee (MPC) members have recently provided their opinions on the outlook in the event of ‘no deal’ but the need to remain apolitical continues to prevent the wider committee making a decisive assumption. However, as Governor Carney commented, a no deal Brexit may require a range of different responses depending on the actual outcome and future relationships. A shift to a ‘no deal’ assumption remains potentially the most obvious catalyst for a shift in the Bank’s interest rate forecasts, though this itself comes with additional political risks in the assumptions made.
At some point, if global growth continues to slide and Brexit-related uncertainty remains an additional drag, the Bank might be forced to change its forecasts anyway. In the meantime, the fog of Brexit continues to pervade the decision-making of every UK institution and corporate. This is likely to weigh on sterling and gilt yields in the near term, though breakeven rates may continue to drift higher, in contrast to other major sovereign bond markets.