November Inflation Report sees Brexit deal sorted soon with no shift from one rate hike a year policy

The bank of England made it clear in November Inflation Report, that with the Brexit uncertainty at its highs weighing on investment activity of business and that is why the Monetary Policy Committee now predicts slightly lower GDP growth rate in a short-term horizon.

Although no-deal, no-transition period Brexit is no the most likely scenario for the Bank of England, it is still ready to act. The Bank of England Governor Mark Carney faced a series of questions about the no-deal scenario at the press conference and he made it clear that the Bank of England will have to differentiate among the short-term and more structural effects.

“The hit to supply would be more rapid than advanced economies are accustomed to,” Carney said at the Inflation Report press conference while indicating that “in no deal Brexit scenario, would need to distinguish between short-term logistical challenges and long-term structural effects on supply capacity.”

Apart from voicing Brexit uncertainty, the November Inflation Report has taken into account that momentum in household consumption was greater than previously expected, supported by the strong labor market and resilient household confidence. On the other hand, business investment has been more subdued than previously anticipated, as the effect of Brexit uncertainty has intensified.

The inflation is above the target for the Bank of England and the pay growth does not need to be as high as its pre-crisis average for unit labor cost growth to be consistent with the inflation target.

Therefore the Bank of England slightly lowered the short-term growth forecast for the UK economy to 1.3% compared with +1.4% in August for 2018, lowered 2019 GDP forecast to  1.7% compared with 1.8% in August and left 2020 GDP forecast unchanged at 1.7%.

The Bank of England policymakers said, that "ongoing tightening" of monetary policy appropriate if the economy grows as forecast, stressing the monetary tightening will only be gradual in terms of pace and limited in terms of extent. 

Should the Brexit fulfill what the Bank of England thinks it is the most likely scenario, meaning that a reasonable Brexit deal will materialize, the UK economy might need a slightly higher Bank rate, although with the gradual approach.

That seeds the Bank of England to an unchanged position from August with one-rate-hike- a-year approach in place.