BOE Grows Increasingly Dovish as Economic Data Deteriorates

Posted Wednesday, January 15, 2020 by
Skerdian Meta • 2 min read

The Bank of England (BOE) used to be neutral last year, as prospects of the Brexit path were unclear. The economy has been weakening since 2018, but the softening picked up pace last year and several sectors fell into contraction, although the BOE remained neutral.

But, once the elections were over and Boris Johnson won a clear majority, the future became clear – the UK will be leaving the EU at the end of this year, with or without a trade deal. So, GBP traders’ attention turned to the real economy and the GBP turned bearish. The BOE turned dovish as well and today’s comments from Saunders point to a rate cut from the BOE soon.

BOE policymaker, Michael Saunders

  • Would not say that a rate cut now is precautionary
  • Aggressive steps needed given limited monetary policy space
  • It probably will be appropriate to maintain an expansionary monetary policy
  • And also to possibly cut rates further
  • Monetary policy space is limited
  • Risk considerations favour a relatively prompt, aggressive response to downside risks
  • Most likely outlook is a further period of subdued growth
  • Economic growth is sluggish, spare capacity is rising, inflation is subdued
  • Brexit uncertainty may continue, weigh further on the economy
  • Neutral level of interest rates may have fallen further over the last year or two
  • Risk management is an extra argument for a rate cut
  • But the case for one also stands without this
  • Economic data justifies a rate cut during the last couple of meetings

He would like an expansionary monetary policy and it would be appropriate to cut rates for him. Markets are fully pricing in a rate cut in September, but it might also happen in this month’s meeting, since odds are 50/50 for that. So, the BOE has turned completely dovish now, justified by the soft inflation report this morning and the GBP will remain bearish, with rate cuts coming up.

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