The new man at the head of the Bank of England will enter the Governor’s job with the UK economy on a slowly improving course, according to the latest update from rate-setters.
Andrew Bailey, who is currently the chief executive of the City regulator the Financial Conduct Authority, was announced to replace current Bank Governor Mark Carney earlier today. Commentary this morning suggests Mr Bailey is seen as a safe pair of hands in monetary policy terms, even if some grumbled that his time at the regulator has left some high-profile consumer issues - like the treatment of investors in now closed funds managed by Neil Woodford - unresolved.
Mr Bailey’s role will include, of course, taking the reins of the Monetary Policy Committee which sets interest rates. The latest meeting of the committee took place this week and confirmed that the nine-strong committee was split on the future course for rates, with seven members voting to keep rates on hold at their current 0.75% level and two voting to cut rates.
The split among committee members reflects the balanced position in which the UK economy currently finds itself. On the one hand, the economy is growing (albeit slowly) and will, in the Bank’s opinion be “supported by the reduction of Brexit-related uncertainties” following the election last week. This underpins the Bank’s view that inflation (which tends to accompany growth) will rise above target by the end of its forecast period.
However, in the shorter term the picture is less clear. Before rising, inflation is expected to come down in the coming months as lower water and energy price rises are reflected in the numbers. The Bank also lowered its forecast for GDP growth in the last quarter of 2019, from 0.2% to 0.1%, and acknowledged that growth in employment and vacancies have slowed down.
It was concerns about the slowing jobs market that prompted the two MPC outliers to vote to cut rates.
For investors, this messy picture is probably good news and an improvement on the recent past. Central Banks appear to be in wait-and-see mode right now, willing to move borrowing costs up or down as the next moves in the global economy become clear. That compares to a year ago when the Federal Reserve, at least, was on a tightening path that would normally hurt asset prices.
The UK stock market has been trading at a discount due to the political uncertainty here. Some of that is now resolved but questions still remain. The Bank’s forecasts are dependent on “an orderly transition to a deep free trade agreement between the United Kingdom and the European Union”. It’s still not clear that is what we’ll get, even if our legal departure from the EU now looks certain.
If the new Government can land a Brexit trade deal which avoids a negative shock to the economy, it will make the new Governor’s job a lot easier.
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