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Departing Carney keeps BoE gun powder dry

31 Jan 2020

Mark Carney’s final act as governor of the Bank of England was a cautious move. Despite worsening macroeconomic data, the Monetary Policy Committee voted unanimously in January to keep rates on hold.

Interest rates remain stable at 0.75% while the stock of corporate and government bond purchases remains constant at £10bn and £435bn, respectively, the committee announced.

The decision follows weeks of investor speculation of further rate cuts, amid weakening inflation figures. Ahead of the meeting, trading patterns of gilt futures suggested that markets had priced in a 50% change of further easing measures.

Early in January, the Office for National Statistics (ONS) announced that CPI inflation had fallen to 1.3%, which is a three-year low and significantly below the 2% target, raising concerns that consumers will continue to hold back on spending.

The fall in price levels is partly driven by a decline in accommodation costs and the falling price of services and clothes, as ONS data in December showed. But the main underlying driver for delays in spending is the uncertainty over Brexit as Michael Saunders, a member of the Bank of England’s Monetary Policy Committee, suggested.

Outgoing governor Mark Carney warned that a potential slowdown of the UK labour market and a weakening of pay growth could add to deflationary trends.

While rates remain stable for the time being, keeping the gun powder dry for his successor might have been a factor that affected Carney’s stance.

Andrew Bailey, who is set to take on Carney’s position as governor of the Bank of England in March, will continue to have a debate on his hands. The nine-person strong Monetary Policy Committee includes at least two economists who have already come out with a more dovish stance. Saunders and his colleague Jonathan Haskel voted for rate cuts at recent meetings.

Saunders warned in a recent speech in Bognor, Ireland, that sluggish economic growth remains unusual given the extremely accommodative monetary policy environment. The former Citigroup economist sees a case for further rate cuts to stave off threats of deflation.

The challenge for the Monetary Policy Committee remains to establish how low interest rates can go, since at 0.75% and with inflation levels of 1.3%, rates are already negative in real terms.

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