Interest rate decision: Bank of England opted to wait for Bailey, Brexit and the Budget

The bank has given a strong indication that it will now leave interest rates on hold for the rest of the year

With no MPC meeting scheduled for February, investors will have to wait another seven weeks to see if the bank, under the governorship of Andrew Bailey, pulls the trigger (Getty)

For a meeting on monetary policy that left interest rates unchanged, it was still a momentous event for two very different reasons. It was the final time that outgoing governor Mark Carney would chair the committee, and it was also the last time it would meet before the first Budget of the new government.

There is no doubt that if a majority of the nine economists had believed they needed to cut rates now rather than wait until 26 March they would have done so. But given there was no clear-cut case and that even City traders were split 50:50 it is no surprise the bank sat on its hands on Thursday.

With no MPC meeting scheduled for February, investors will have to wait another seven weeks to see if the bank, under the governorship of Andrew Bailey, pulls the trigger.

George Brown, a UK economist at Investec bank, notes that Carney appeared “particularly keen” to avoid guiding markets one way or another in his press conference after the decision. “A key motivation for Dr Carney’s tepid steers on the policy outlook is a desire to avoid tying the hands of his successor, who takes over as governor on 16 March,” he said.

The committee also appears intent on gathering more concrete evidence on how the economy is performing at the start of 2020 and how key events and risks shape up, especially the future UK-EU relationship, global trade tensions and the coronavirus.

The other key economic event between now and the next meeting will be Sajid Javid’s first Budget on 11 March. Last year’s spending review committed to higher spending and the Budget may unveil extra investment commitments.

Kallum Pickering, senior economist at Berenberg bank, estimates that the fiscal stimulus announced at the Budget may add up to 0.6 percentage points to headline growth this year. On its own, this would lift the bank’s annual projection for 2020 from 0.75 per cent to 1.35 per cent.

“Reacting to the likely upgrades to its forecasts – to well above the BoE’s updated estimate of supply potential of 1.1 per cent – expect the MPC to tilt sharply hawkish in the coming months,” he said.

Two of the MPC members who had raised the idea of a rate cut, Sylvia Tenreyro and Gertjan Vlieghe, had said that it would be an insurance policy that was conditional on a further downturn that has, so far at least, not manifested itself. They decided not to cash in the policy.

George Buckley, an economist at Nomura, agrees, saying that although he had expected a cut at this meeting, he had always believed that January only offered a “brief window” that had now closed. “If our own and the bank’s forecasts for recovering growth come to pass, we think there should be no need to loosen policy as we move through this year,” he said. “This is supported by today’s vote, which turned out not to be a close call at all.”

By dropping hints that it can see a situation where it could either cut or raise borrowing costs, the bank has given a strong indication that it will now leave interest rates on hold for the rest of the year. Whether that turns out will depends on the three Bs of Brexit, Bailey and the Budget.