BOE Stays Put as Deadline of Brexit Talk Approaches

BOE left the Bank rate unchanged at 0.1% and the asset purchase program at 875B pound. The central bank remained cautious about the “unusually uncertain” economic outlook and pledged to take “whatever additional action is necessary” if the outlook for inflation weakens. Despite forecasts that GDP growth in December would come in weaker than November’s projections, British pound extended rally after the announcement. The market is hopeful of a trade deal as the UK and the EU have set a deadline on Sunday.

As noted in the accompanying statement, the central bank indicated that UK’s economic developments depend on “the evolution of the pandemic and measures taken to protect public health, as well as the nature of, and transition to, the new trading arrangements between the European Union and the United Kingdom”, as well as “the responses of households, businesses and financial markets to these developments”.

In light of the resurgence of the coronavirus cases, tighter restrictive measures have been put in place since the November. With regard to this, the central bank noted that GDP growth in December should be weaker than what was projected last month. The minutes suggested that “a higher average level of restrictions in England, as well as stricter restrictions on hospitality within each tier” should “weigh on social consumption in December”. While “there had continued to be some positive offset from delayable consumption, for example from spending on technology, DIY and furniture, but other sectors, such as fashion and beauty, had remained particularly weak”.

Policymakers cautioned that additional restrictions imposed since the November forecast should weigh more on activity in 1Q21. Despite hopes that “vaccines should support the gradual removal of restrictions and rebound in activity that was assumed in the November Report”, it remains unclear about how such prospect would “affect the immediate economic behaviour of households and businesses”.

On the monetary policy stance, the BOE left all measures unchanged this month. The members, however, pledged that it would “continue to monitor the situation closely” and “take whatever additional action is necessary to achieve its remit” if inflation weakens. It added that there is no intention to “tighten monetary policy at least until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably”.