Bank of England takes dovish turn, but for how long?

The Bank of England (BoE) left interest rates at 0.75% as expected. However, there was a surprise as two members of the monetary policy committee voted to cut rates.

The more dovish[1] vote (7-2 rather than the widely expected 9-0) came alongside a downgrade to the bank’s global growth assumptions.

Weaker UK growth is also a consequence of incorporating the new Brexit deal into the forecasts. In addition, the bank slightly softened its language on the need for future rate hikes.

At the margin, today’s outcome is a move back in step with central banks elsewhere and the easing in global interest rates. Nonetheless, recent developments suggest the prospect of an actual rate cut are fading.

First there are some signs of stability in the business surveys which track global activity. The UK purchasing managers' index ticked up in October, helped by better export orders.

Second, the opinion polls suggest a Conservative party win in the upcoming general election. Whilst this does not rule out the tail risk of a hard Brexit at some stage, it should reduce the drag from uncertainty as the current deal goes through.

Third, putting the opinion polls to one side, whoever wins the election we will see a substantial fiscal boost to the economy next year. The bank is factoring in the stronger spending plans made back in September, but both the Conservatives and Labour look set to go well beyond these, judging from today’s announcements from Sajid Javid and John McDonnell.

Whilst there remains considerable uncertainty over the election result there are sufficient reasons to think that the BoE’s dovish tilt may not last long into 2020.

[1] When a central bank takes a dovish stance it means it is promoting accommodative monetary policies that usually involve low interest rates.