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Bank of England Drinks the Rate-Cut Kool-Aid

Marcus Ashworth
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Bank of England Drinks the Rate-Cut Kool-Aid

(Bloomberg Opinion) -- The Bank of England’s language has shifted markedly this past week to signalling the next move in interest rates will be lower, and might happen as soon as Jan 30.

Two members of its nine-person Monetary Policy Committee voted for a cut at the last meeting and now Governor Mark Carney has sent a clear dovish signal, along with MPC members Silvana Tenreyro and Gertjan Vlieghe. If these three joined the easing camp, that would be enough to tip the next vote. The key to a rate cut hinges on data from a crucial purchasing managers survey on Jan 24.

That will be the first proper look at how the economy is reacting since Boris Johnson’s election win in December. Yet similar forward-looking PMI surveys have been poor predictors of economic performance over the past year. It would be foolish of the BOE to pin its rates strategy on one set of data, especially so soon after a game-changing election.

In an FT interview published at the weekend, Vlieghe said he’d vote for a cut at the Jan. 30 MPC meeting, noting: “If you knew nothing about Brexit... and just looked at the U.K. data, you could reasonably make the case we should have cut rates already.” It’s surprising that MPC members seem keen to act to suddenly. Logically, it would be better to wait until the BOE’s next major meeting in May, allowing time for Johnson’s administration to bed down. Talking down the economy risks becoming self-fulfilling and won’t bode well for future relations with the new government.

Global recession risks have eased with a phase one U.S.-China trade deal due to be signed this week. There are even some signs of recovery in the euro zone. British unemployment is at a record low, wage gains are increasing and inflation is below target: hardly a compelling case for lower rates. So unless the Bank’s growth and inflation forecasts at the Jan. 30 meeting are dire, it would look most odd to cut rates. A raft of economic data for November, released Monday, was pretty mixed.

Holding fire to see how the economy reacts to Brexit finally taking place at the end of the month, and how the ensuing trade talks with the European Union shape up, makes more sense. Carney’s replacement Andrew Bailey assumes the role in March, and a delay would give him time to assess any impact from Johnson’s fiscal plans — which will certainly alter the Bank’s longer-term forecasts.

Several business and consumer confidence surveys suggest an improvement after the election. The December services PMI saw the biggest revision upward for more than four years. That would usually point to a much stronger January. The latest quarterly Deloitte survey of finance directors’s confidence delivered its biggest bounce ever.

Chancellor Sajid Javid will unveil his budget on March 11, and he has up to 100 billion pounds ($130 billion) of fiscal headroom. The temptation for a major spending splurge is definitely there to balance any early damage from Brexit. The U.K. has just announced a surprisingly large increase in gilt issuance this quarter of 14 billion pounds — why raise money if the government doesn’t expect to use it?

Although any infrastructure building will take years to play out, it will have an immediate effect on business planning and hiring. The BOE could easily be setting themselves up for a policy mistake if it does cut too soon, similar to its heavy-handed response in 2016 to the Brexit referendum, which Carney then spent three years trying to unwind. Better to wait for May than a knee-jerk cut. Give the data a chance.

To contact the author of this story: Marcus Ashworth at mashworth4@bloomberg.net

To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.

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