The BoE Hits the Pound. Uncertainty Has Become the Hip Word for Central Banks

The September MPC

The Monetary Policy Committee of the Bank of England left interest rates unchanged at 0.10% today.

Additionally, the MPC also voted to maintain its QE total at £745bn.

The QE total consists of the BoE’s existing programs of UK government bond and sterling non-financial investment-grade corporate bond purchases financed by the issuance of central bank reserves.

Both decisions were in line with market expectations. More importantly, the Committee voted unanimously in favor of a hold. Following some dovish chatter, none of the members chose to dissent this time around.

The MPC Meeting Minutes

While the vote to stand pat was expected, there was some degree of uncertainty over the BoE’s outlook. Not just on monetary policy but also on the economic outlook.

A reintroduction of containment measures to curb the spread of COVID-19 and Brexit remained key considerations.

Salient points from the MPC Meeting Minutes included:

• The outlook for the economy remains unusually uncertain.
• In August, the MPC’s central projections assumed that the direct impact of COVID-19 on the economy would dissipate gradually.
• Additionally, the projections assumed an immediate, orderly move to a comprehensive free trade agreement on 1^st January 2021.
• Substantial fiscal and monetary policy actions also supported the BoE’s economic activity outlook.
• Indicators of global activity have been broadly in line with the Committee’s expectations back in August.
• Recent domestic economic data have been a little stronger then the Committee expected back in August.
• Given the risks, however, it is unclear how informative Committee members are about how the economy will perform further out.
• Recent increases in COVID-19 cases in parts of the world, including the UK, could weigh further on economic activity.
• The view is, however, that any impact would be on a lesser scale than seen earlier in the year.
• Risks of a more persistent period of elevated unemployment than in the MPC’s central projection remains. This was also the view back in August.

The Committee will, therefore, continue to monitor the situation and stands ready to adjust policy to meet its remit.

Additionally, the Committee does not intend to tighten monetary policy until there is clear evidence that significant progress is being made in:

• Eliminating spare capacity.
• Achieving the 2% inflation target sustainably.

The British Pound

At the time of writing, the Pound was down by 0.71% to $1.28748.

Earlier in the week, Brexit troubles on Boris Johnson’s front door had provided some much-needed support for the Pound.

Last week, the Pound had slumped by 3.64% to visit sub-$1.28 levels before a partial recovery this week.

Ahead of the MPC’s policy decision and minutes, the Pound had clawed its way back to $1.30 levels before hitting reverse today.

Looking Ahead

With the MPC focused on both inflation and spare capacity, tomorrow’s retail sales figures will influence.

Greater spare capacity on the economy would ultimately be a drag on consumption that would weigh on inflationary pressures.

Looking ahead to next week’s numbers, September’s prelim private sector PMIs will also be key.

In the wake of the EU Referendum, the BoE did not hesitate to make a move based on survey-based data.

When considering key stats due out and Brexit and COVID-19 uncertainty, it is going to be a rocky road for the Pound.

On the Brexit front, the House of Lords vote on the Internal Market Bill could be the killer blow next week. Failure to reach a trade agreement knocks off one of the MPC’s assumptions made for its economic projections…