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UK: Bank of England Holds Rates but Slashes Growth Forecasts Global Economics & Markets Research Email: [email protected] URL: www.uob.com.sg/research Macro + FX Strategy UK: Bank of England Holds Rates But Slashes Growth Forecasts Friday, 31 January 2020 At its first monetary policy decision for the year, but Mark Carney’s last decision as Bank governor, the Bank of England (BoE) Monetary Policy Committee (MPC) voted 7-2 to hold its Bank Rate unchanged at 0.75%. The MPC also voted unanimously to maintain the stock of sterling non-financial investment-grade corporate bond purchases at GBP10bn Lee Sue Ann Economist and the stock of UK government bond purchases at GBP435bn. Going forward, Andrew [email protected] Bailey will succeed Mark Carney as the 121st governor. Peter Chia Senior FX Strategist What was surprising was the form and size of the dissenting minority, which remained at [email protected] just two MPC members. Dovish comments in mid-January from BoE Governor Mark Carney and MPC Members Gertjan Vlieghe and Silvana Tenreyro implied that downside surprises in pre-election macroeconomic data from Q419 would move them to join Jonathan Haskel and Michael Saunders in voting for a rate cut at this meeting. Instead, most MPC members prioritized the recent uptick in post-election business optimism captured in January’s PMIs, noting that it had improved “quite markedly in some cases”, over the softness in actual data. That said, the Monetary Policy Summary and minutes of the Monetary Policy Committee meeting largely reiterated that “policy may need to reinforce the expected recovery in UK GDP growth should the more positive signals from recent indicators of global and domestic activity not be sustained or should indicators of domestic prices remain relatively weak”. But some weakening in the growth backdrop is already embodied given the weaker GDP growth profile. In Its latest Monetary Policy Report (MPR), the BoE materially downgraded the forecasts for the UK’s economy, with real GDP growth in 2020 sliced from 1.25% to 0.75% y/y, whilst projections for 2021 and 2022 were cut by a quarter-point. Meanwhile, inflation is projected to stay below the BoE’s 2% target until 2021. Please refer to Table 1.A in the MPR as shown below: Table 1A: Forecast Summary Source: BOE, UOB Global Economics & Markets Research UK: Bank of England Holds Rates But Slashes Growth Forecasts Friday, 31 January 2020 1 | P a g e We had earlier shared that the core BoE position is still to ‘wait-and-see’ and remain data- dependent. Please kindly refer to: UK December CPI Significantly Weaker-Than-Expected dated 16 January 2020. We still maintain the same view, as we believe that the two dissenters against a large majority is still somewhat premature in tipping the balance for a rate cut. That said, we acknowledge a more dovish tilt reflected in this month’s Monetary Policy Summary as far as the Bank’s forward guidance is concerned. The MPC had replaced reference to the need for “limited and gradual” interest-rate increases with an expectation of “some modest tightening” if the MPR’s growth projections are met. Going forward, the BoE’s monetary policy direction will likely hinge on the prospects of the UK economy, and the extent to which Boris Johnson delivers on its election promises. For now, we think that the offsetting forces between the perceived improvement in economic data and upcoming fiscal stimulus as well as potential resurgence of Brexit uncertainty related to the UK-EU trade negotiations during the transition period should keep the BoE on hold. A Rate Pause For Now Source: Macrobond, UOB Global Economics & Markets Research FX Outlook: GBP/USD To Remain Stable Above 1.30 After over 3 years of back and forth deliberations and drama, Brexit is finally taking place today (31-Jan). While uncertainties of the transition period (which runs till end-2020) and that of the weak UK economy remain, volatility on the GBP going forward may not be as “extreme” compared to last couple of years when markets were reacting to probabilities of a no-deal Brexit. Indeed, 3-month implied volatility of GBP/USD has fallen to 6.1%, lowest levels since late 2014. After a strong 7.9% rebound to about 1.32 in 4Q19, GBP/USD has transited into a sideways range between 1.2955 and 1.3278 since the start of the year. Despite rising odds of a BoE rate cut by May (43% probability as at 31-Jan, compared to 20% at in early Jan), the impact on the GBP/USD has been modest with declines limited to just under 1.30. According to CFTC data as at 21-Jan, markets still maintain a small net long position of 24,922 contracts in GBP/USD. Until the UK economy shows further weakness, it is likely GBP/USD would remain stable. Overall, we maintain our forecasts for GBP/USD at 1.31 in 1H20 and 1.32 in 2H20. UK: Bank of England Holds Rates But Slashes Growth Forecasts Friday, 31 January 2020 2 | P a g e Disclaimer This publication is strictly for informational purposes only and shall not be transmitted, disclosed, copied or relied upon by any person for whatever purpose, and is also not intended for distribution to, or use by, any person in any country where such distribution or use would be contrary to its laws or regulations. This publication is not an offer, recommendation, solicitation or advice to buy or sell any investment product/securities/instruments. Nothing in this publication constitutes accounting, legal, regulatory, tax, financial or other advice. Please consult your own professional advisors about the suitability of any investment product/securities/ instruments for your investment objectives, financial situation and particular needs. The information contained in this publication is based on certain assumptions and analysis of publicly available information and reflects prevailing conditions as of the date of the publication. Any opinions, projections and other forward-looking statements regarding future events or performance of, including but not limited to, countries, markets or companies are not necessarily indicative of, and may differ from actual events or results. The views expressed within this publication are solely those of the author’s and are independent of the actual trading positions of United Overseas Bank Limited, its subsidiaries, affiliates, directors, officers and employees (“UOB Group”). Views expressed reflect the author’s judgment as at the date of this publication and are subject to change. UOB Group may have positions or other interests in, and may effect transactions in the securities/instruments mentioned in the publication. UOB Group may have also issued other reports, publications or documents expressing views which are different from those stated in this publication. Although every reasonable care has been taken to ensure the accuracy, completeness and objectivity of the information contained in this publication, UOB Group makes no representation or warranty, whether express or implied, as to its accuracy, completeness and objectivity and accept no responsibility or liability relating to any losses or damages howsoever suffered by any person arising from any reliance on the views expressed or information in this publication. UK: Bank of England Holds Rates But Slashes Growth Forecasts Friday, 31 January 2020 3 | P a g e .
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