Bank of England stays on hold, GBP little changed

Summary:

• Rates unchanged as broadly expected, no votes for a hike

• Brexit uncertainty has risen, the current stance of rates appropriate

• GBP trades slightly off its highs following the decision

The Bank of England did not surprise market participants and chose to maintain the benchmark rate at its current level of 0.75%. The initial reaction seen on the pound was slightly bearish but the move was not substantial. Based on the recent BoE’s report regarding Brexit (the BoE presented the gloomy outlook if no deal is reached) today’s statement underlined that Brexit-related uncertainties have mounted. Here are the most important points from the statement and the minutes:

• MPC votes unanimously to maintain rates unchanged

• Domestic inflation pressures continue to build

• UK GDP growth has weakened, BoE sees 0.2% growth in the final quarter of this year and the first quarter of the following year

• Autumn budget will increase GDP by 0.3% in the long-term

• Inflation seen to fall below 2% in January

• Brexit uncertainties have intensified since November

• Current stance of monetary policy is appropriate

• Main challenge is to assess implications of Brexit

In the minutes the BoE emphasized that “the broader economic outlook will continue to depend significantly on the nature of EU withdrawal” signalling that this thread should dominate macroeconomic data in weeks to come. The bank has also tied its decision to what happens in terms of Brexit writing that it “could be in either direction”. While the BoE sees inflation falling below its 2% target, mainly due to crashing oil prices, stronger than expected wage growth and weak productivity seem to suggest that underlying inflation pressures are still building up. As one may see, everything hinges on Brexit as for now, hence it is extremely hard to predict where the BoE may go with rates from the current levels. The subdued reaction seen in the pound today also shows that market participants are fixated on further Brexit developments playing down the decision. Therefore, while we still see value in the GBP, it would be appropriate to wait for more information concerning the UK exit from the EU to place money here. We will keep a close eye on the pound perceiving it as strongly undervalued next to NOK or SEK.