There were no surprises from today’s Bank of England rate meeting as the central bank left monetary policy unchanged, citing an unusually uncertain economic outlook, and an unemployment rate of 7.5% by year end.
They did tweak their policy forecasts for GDP and inflation, revising the economic damage for the lockdown to the downside for this year to -9.5% from -14.5%, however they also modified the extent of the economic rebound in 2021 to the downside as well, from 15% to 9%.
Its inflation forecasts were more noteworthy, projecting 0.25% CPI for 2020, and then a sharp recovery to 1.75% in 2021. This stands in stark contrast to their May predictions of 0.6% and 0.5% respectively. This seems a stretch, if as they predict unemployment stays high, and the recovery is as muted as they say.
If anything, their unemployment targets may be a little on the optimistic side, along with their predictions of the strength of any recovery. Their predictions for credit losses of around £80bn also seem a little on the low side, given the potential for future localised outbreaks and lockdowns, which could make an economic rebound tepid at best.
The central bank also continued to flog the dead horse of negative rates, saying that they continued to monitor the sustainability of the policy.
We already know from the experience of Japan and Europe the damage negative rates does to the banking system overall, and the UK with its huge financial sector is unlikely to be any different. If anything negative rates could weaken the UK financial sector even further, thus destabilising the economy even more.
In any event there was nothing particularly dovish about any of these comments with the pound only slightly firmer, just below the March peaks at 1.3200.
Disclaimer: CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.
