A Fond Farewell to the Unreliable Boyfriend?

Thursday’s hotly anticipated January statement from the Bank of England (BoE) came and went with a whimper rather than a bang, as the Monetary Policy Committee (MPC) decided to keep interest rates unchanged at 0.75%.

In what was Mark Carney’s last meeting as governor of the Bank, the MPC delivered a mixed message. There was optimism on the pick-up in domestic activity and the global outlook, but growth forecasts for the UK were cut to just 0.75% for 2020 (50bp down on the November statement), and 1.5% and 1.75% respectively for 2021 and 2022 (both 25bp cuts from November).

At the start of the year, markets were pricing in less than a 10% chance of a January rate cut, but by Thursday’s meeting this had increased to over 50% thanks to dovish comments from MPC members, including Carney, which once again called into question the quality of communication from the BoE. Governor Carney was keen to stress that markets had over-interpreted his speech in early January, but comments from his fellow MPC member Silvana Tenreyro on January 17 certainly hinted that a cut was a live possibility and it is not difficult to see why markets reacted as they did.

Central to the argument that a rate cut might be needed was poor economic data in November and December, and if data had continued along similar lines then we may well have had a different decision from the MPC. However, it was obvious to us that this data would be negatively impacted by the Brexit negotiations and their accompanying votes in parliament, as well as by the general election, which seemed delicately poised before the result was announced. The so-called “Boris bounce” since then, and since the BoE comments, has delivered undeniably positive economic data and despite Carney’s protestations, we have to question if markets would have been better served by MPC members waiting to see the data, rather than making dovish comments but emphasising that they were “data dependent”. Certainly the volatility in UK Gilts and in sterling would likely have been avoided, as it is difficult to argue that this was anything other than BoE-generated.

The outlook from here, as emphasised by the statement, is somewhat uncertain. Activity has certainly picked up, and “quite markedly in some cases”, but how long this will last is difficult to predict. On the positive side, the UK has a government with a big majority and aggressive fiscal expansion plans, with a tax cut in the form of a higher National Insurance threshold already announced. Johnson’s government also seems determined to follow through on election policies, though months of (probably) tense negotiations with the Europe Union lie ahead, and while the US has promised that the UK is at the front of the queue for a transatlantic trade deal, business investment could be put on hold again if significant roadblocks arise. All in all, though we acknowledge the difficulty in predicting UK growth for 2020, we do believe there is a case for growth to surprise on the upside.

For now, we bid farewell to Governor Carney, who will shortly take up his climate envoy role with the United Nations. He will be praised for increasing transparency and communication from the BoE, following a global trend for central banks, but he will also be remembered as the ‘unreliable boyfriend’, a label he certainly didn’t like and was in no way lessened by his final meeting. His successor, Andrew Bailey, will be keen to avoid being given the same moniker.