Bank of England Has Nowhere to Go With `Brexit' in the Limelight

The Bank of England will probably keep its key rate at a record low on Thursday, where it’s been for seven years, as the threat of a British exit from the European Union takes center stage.

These charts show how the U.K.’s economic outlook has evolved since the Monetary Policy Committee’s February meeting. The central bank will publish its March interest-rate decision at noon in London alongside the minutes of its gathering.

The good news is that global market jitters have abated and wage growth has ticked up. Yet investors also woke to the risks stemming from the EU referendum, sending the pound to the lowest since 2009 against the dollar, and Governor Mark Carney told lawmakers last month that officials have “considerable room” to ease policy if needed.

First up, market turmoil, which spiked in the immediate aftermath of the February meeting but has since calmed.

On the flip side, investors spooked by the prospect that Britain might opt to quit the EU in its June 23 referendum sent the pound plunging and sterling Volatility gauges soaring. A weaker currency helps British exporters and puts upward pressure on inflation, which at 0.3 percent in January was well below the BOE’s 2 percent target, but the volatility can undermine confidence and complicate investment decisions.

Domestic indicators have been mixed. A labor-market report on Wednesday showed a pickup in wages, but Markit Economics’ gauge of services, which account for about three quarters of the nation’s output, dropped to the lowest in almost three years.

Moreover, with indicators of construction and manufacturing also weakening, Markit said economic growth could cool this quarter. In his budget on Wednesday, Chancellor of the Exchequer George Osborne cut the government’s forecast for 2016 to 2 percent from 2.4 percent, and for next year to 2.2 percent from 2.5 percent.

At a press conference after the February meeting, Carney said all nine MPC members thought the next rate move would be up, rather than down. Investors don’t see an increase until the first quarter of 2017 -- and are pricing in the possibility of a cut this year.

“Since last month’s meeting, global financial markets have calmed down and I would expect that to be acknowledged in the MPC statement and minutes,” said Brian Hilliard, chief U.K. economist at Societe Generale SA in London. “Inflation trends remain benign and the committee will feel under no pressure to hike this year.”

--With assistance from Andrew Atkinson and Scott Hamilton To contact the reporter on this story: Jill Ward in London at jward98@bloomberg.net. To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Emma Charlton

By: Jill Ward

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