BoE: Dovish hold – Nordea

Morten Lund, an analyst at Nordea Markets, notes that at today’s meeting, Bank of England (BoE) unsurprisingly kept all its monetary policy instruments unchanged and was in line with both our view and consensus.

“Just like in November, two out of nine members dissented, with Jonathan Haskel and Michael Saunders favouring a 25 bp cut.

The overall message was slightly dovish. Thus, despite the Conservatives winning a solid absolute majority at the general election, the outlook of the economy remains weak and the uncertainty about the phase two negotiations concerning the future relationship with the EU persists. The BoE also see the risk skewed to the downside in relation to its economic projections.

Compared to the November inflation report, the BoE now expects growth in Q4 to be 0.1% q/q instead of 0.2%. This is above what is implied by the PMIs (point to -0.2% in Q4), but the PMIs have had a clear tendency to underestimate growth in 2019 in times of political uncertainty (notice latest flash PMIs were collected in the run-up to the general election). Our forecast is therefore also in line with the BoE, although the risk is clearly skewed to the downside.

Further out, GDP is expected to be 1.6% y/y in Q4 2020. We find that to be too optimistic. Thus, we do not expect an investment boom in Q1 2020 (as Boris Johnson has otherwise “promised”) on the back a likely ratified divorce deal as decision makers will soon be reminded of the lack of clarity about the difficult phase two trade negotiations. Therefore, we only expect to see a modest rebound in business investments after 31 January.”