The Bank of England kept its Bank Rate steady at 0.75% at their meeting on Thursday 30 January. Bethany Payne, Portfolio Manager within Global Bonds, believes that today’s decision has bought time for the new governor, Andrew Bailey, giving him room to act proactively should the need arise.  

 

On the eve of Brexit and at Mark Carney's last meeting as Governor of the Bank of England, the pound strengthened as rates were kept on hold at 0.75%. The bank’s decision was less dovish than the market expected with only two dissenters calling for the immediate need for rate cuts; the same number as in the bank’s December meeting. Despite lacklustre economic performance and inflation remaining materially below the bank's target, the Monetary Policy Committee (MPC) has bought time for the new governor, Andrew Bailey, who succeeds Carney in March 2020.

Governor Carney highlighted that the recent rebound in sentiment and confidence surveys since the December general election, as well as expected fiscal stimulus in the March budget, would provide key tailwinds for the economy, which could push up equilibrium rates in the UK. However, while the scales fall from the MPC’s eyes on the UK's withdrawal from the European Union (EU), their vision has not cleared completely. They therefore remain reactive to incoming data and maintain the need for proactive monetary policy to reinforce activity if indicators do not recover broadly in line with their expectations.

With Boris Johnson's UK/EU trade plans seemingly less ambitious than the bank’s assumption of an orderly transition to a deep Free Trade Agreement (FTA) – with divergences only emerging over time, and his objective of not extending the transition period beyond the end of 2020, the road map for the UK economy will soon become clearer. Today’s Bank Rate decision, to leave interest rates on hold, gives the new governor, Andrew Bailey, room to act proactively and reinforce activity with monetary easing if the need arises.