LDN - Business

UK politics transformed, but Bank of England to stay on hold

[December 17, 2019] By William Schomberg

LONDON (Reuters) - The election triumph of Prime Minister Boris Johnson has cleared up Britain's political outlook, but the Bank of England won't be rushing to respond to the end of the deadlock.

The BoE will keep interest rates on hold this week, according to all 69 economists polled by Reuters.

Where there are differences, however, is over whether the British central bank's next move will be to cut rates, following recent moves to ease policy by the European Central Bank and the U.S. Federal Reserve, or to raise them in 2020.

Britain's economy flat-lined before the high-stakes election on Dec. 12, which added to the longstanding uncertainty about Brexit and the drag from a slowing global economy.

Little wonder, then, that in November two of the BoE's nine interest rate-setters cast the first votes for a cut in borrowing costs since shortly after the 2016 Brexit referendum.

But since then, Johnson's new majority in parliament has eliminated doubts about whether Brexit will happen on Jan. 31, and buried the prospect of a sharp leftward shift in politics under a Labour Party-led government.

There are also signs that the U.S.-China trade war is easing, raising the prospect of a more benign economy for whoever takes over as BoE governor from Mark Carney, who is due to stand down at the end of next month.

Samuel Tombs, an economist with Pantheon Macroeconomics, thinks Britain's quarterly economic growth rate will double to 0.4% in the first half of 2020 as companies and consumers catch up with spending they had been putting off.

Britain's government also plans to increase its spending.

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A bird flies past The Bank of England in the City of London, Britain, December 12, 2017. REUTERS/Clodagh Kilcoyne

That would create a brief window for the BoE to raise its benchmark rate from its current level of 0.75%, close to its lows for most of the 10 years since the global financial crisis, Tombs said.

"The MPC will be keen to act quickly before Brexit risks emerge again to hike and to build scope to ease again whenever the next downturn hits," he said in a note to clients.

Johnson promised voters that he would not extend the Brexit transition period that is due to end on Dec. 31, 2020.

But many trade experts question whether a free trade deal with the European Union can be struck by then, raising the prospect of trade barriers in just over a year's time.

While sterling and British shares soared after Thursday's election, the prospect of renewed Brexit tensions has remained in focus for investors in British government bonds, with gilt prices implying a 40% chance of a rate cut by the end of 2020.

Ruth Gregory, an economist at Capital Economics, said the message from this week's BoE meeting might sound similarly cautious, with Britain's inflation rate below the BoE's target and the jobs market faltering.

She said MPC members Michael Saunders and Jonathan Haskel could well vote for a rate cut again "and the latest data may have been sufficiently weak for at least one more dovish MPC member -- possibly Gertjan Vlieghe -- to join them."

(Reporting by William Schomberg; Editing by Catherine Evans)

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