The BOE left the Bank rate unchanged at 0.25%, the government bond purchases at 435B pound and corporate bond purchases at 10B pound. As we had anticipated, the members voted 6-2 to leave the interest rate unchanged with the newcomer Silvana Tenreyo supporting to maintain the status quo. Ian McCafferty and Michael Saunders continued to believe a +25 bps rate is needed. Sterling slumped after the announcement as the central bank downgraded the growth and wage forecasts. Governor Mark Carney warned that Brexit uncertainty is weighing on the country's economic outlook.
The members cut the GDO growth outlook to +1.7%, from +1.9% previously, for 2017 and +1.6%, from +1.7% previously, for 2018. Inflation outlook is revised modestly higher to +2.7% (+2.6% previously) for this year and unchanged at +2.6% for 2018. The forecast fro 2019 also stays unchanged at +2.2% . Governor Mark Carney suggested that if "households and business look through the flurry of headlines then the economy can be expected to pick up". He noted that the country's current economic performance is "sluggish".
Undoubtedly, Brexit is a key factor for the downgrade. At the press conference for the quarterly inflation report, Carney noted that the uncertainty over Brexit negotiation "weighs on the decisions of businesses and households and holds down both demand and supply". Note, however, that the downgraded growth forecast for 2017 was based on a "smooth" Brexit in 2019. This, according to Carney, remains the "most realistic assumption". Upon triggering Article 50 of the Lisbon Treaty on March 29, PM Theresa May has officially started the 2-year negotiation of the UK leaving the EU. The parliamentary election held in June has increased the uncertainty. a hung parliament was resulted as the Conservative Party failed to gained more than 625 seats. It eventually formed a coalition government with DUP, which supports Brexit but has reservation over PM May's hard Brexit stance. Meanwhile, with its big jump in the number of seats, Labors, the major opposition party, would be more influential over the Brexit negotiation. The opinions amongst parties have never been more divided.
On the monetary policy outlook, BOE forecasts two rate hikes in three years with the first hike coming in 3Q18. Chief Economist Andy Haldane noted in June that he would likely support a rate hike in 2H17. Yet, he stayed in the dove camp this time.