Bank of England Preview: All quiet on the rate hike front as MPC lacks Brexit clarity

 

• The Monetary Policy Committee of the Bank of England is expected to opt for a wait-and-see mode while deciding on monetary policy and its outlook in February Inflation report.
• The policy stance is highly conditioned by the actual form of Brexit that the UK government will deliver, with the Bank of England likely to point to the risks of no-deal Brexit to the UK economy and its currency.
• The Bank of England is set to stick to its one rate-hike-a-year policy with May becoming the most probable option for a hike once the dark clouds of Brexit disappear.

The Monetary Policy Committee (MPC) of the Bank of England is expected to keep the monetary policy unchanged just as it did back in November and December last year with the Bank rate at 0.75% and the stock of the purchased assets at £435 billion.

There are no many options for the MPC at the moment of hight Brexit uncertainty as the House of Commons rejected the government's Brexit proposal and the UK Prime Minister did not yet secure any variations to the current proposals with the partners in the European Union.

While leaving the monetary policy unchanged, the Bank of England is likely to voice once again the risks of a no-deal Brexit and say that no-deal Brexit is not the most likely scenario. 

Given the slide in oil prices and a tight UK labor market conditions, the Bank of England Governor Mark Carney is expected to revise the short-term inflation forecast downwards while sticking to “gradual and limited” language as far as regarding the outlook for the Bank rate.

The Bank of England faces two contradicting trends related to its main policy target, the inflation. The oil price slump in the final quarter of 2018 is pressing on headline inflation to decelerate in the short-term while the UK labor market is tight with the unemployment rate at a 4-decade low and the UK wages are rising at the fastest growth rate in a decade.

While the Bank of England may downplay the short-term inflation outlook and say it is temporary, the long-term outlook for inflation is more and more likely to be driven by the rising wages and that is fundamentally much more important factor. 

With Brexit uncertainty weighing on the economic activity and the forward-looking indicators like PMIs pointing to a sharp deceleration in the UK economic activity with new orders and exports down, the Bank of England is most likely to stick to its one rate-hike-a-year policy that makes May Inflation report the hottest candidate for the rate hike in 2019.

The twist to the outlook for the Bank rate that would change the expectations top no rate hike this year would have a detrimental effect on Sterling, especially should the outlook change because of the negative Brexit deal implications.