GoldPrice.

The central bank of England has chosen not to increase rate hikes for the time being, with future monetary policy regarding rate hikes uncertain and dependent on the outcome of Brexit which will be revealed in under 100 days.

Key Takeaways

• The BoE states that Brexit uncertainty has intensified considerably over the last month with a decline in the price of oil setting a course for the inflation rate to drop below its 2% target.
• The BoE’s Monetary Policy Committee (MPC) voted unanimously to leave the interest rate as is at 0.75%.
• Sterling traded up 0.6% on the news that the interest rate would hold steady for the time being.

With less than 100 days before the UK leaves the European Union and no solution regarding which deal will be implemented on the horizon, uncertainty is greater than ever.

The central bank raised rates by a quarter percentage point in August, with rates then reaching their highest point since March 2009. Policymakers revised the forecast for Q4 GDP growth down from 0.3% to 0.2%, and stated that a similar outlook was likely for Q1 2019.

BoE:

- 0.75% (unch) as expected
- 9-0 vote as expected
- Warn that Brexit uncertainty has intensified since Nov
- As such, have lowered Q4 2018 growth estimate to 0.2% from 0.3%
- CPI could fall below 2% amid oil declines
- Maintain guidance on rates; 'gradual and limited'

— Adam Linton (@Adamlinton1) December 20, 2018

Future Policy

The uncertainty is such that the benchmark rate of interest could go up or down after Brexit depending on the outcome, with the BoE president stating that a no-deal outcome would be the worst outcome, describing it as “a real economy shock”.

British PM Theresa May canceled a vote on her Brexit deal earlier this month, acknowledging that it most likely would be voted down by lawmakers, and is now in negotiations with the EU regarding the issue of a hard border between Northern Ireland and the Republic of Ireland.

May’s deal has been criticized by those who feel that it locks the UK into a customs union with the EU, while May points out that a no-deal solution could potentially be catastrophic for trade and for the UK economy which is the 5th largest in the world and a significant player in world trade and finance.

A vote regarding May’s deal is now due in late January.

Expert Outlook

MPC members said “Brexit uncertainties have intensified considerably since the committee’s last meeting. These uncertainties are weighing on financial markets.”

Mike Jakeman, a PWC senior economist, said “There is growing evidence that the economy has weakened since summer, with monthly GDP data from the ONS showing flat or only very marginal growth in recent months, while consumer price inflation is slowing and the retail sector is struggling during the vital period in the run-up to Christmas. Add to this the continued lack of clarity around Brexit since its last meeting, and it is clear that interest rates will have to remain on hold for some time.

That said, the Bank noted the growing tightness of the labor market, which has pushed wage growth higher than the central bank had previously anticipated. There is also the possibility that lower global oil prices could also stoke domestic demand. However, these positive factors do not outweigh those indicating a slowing economy.”

Jakeman went on to state that Brexit would be what influenced the Bank’s next move in terms of interest rates which could go in “either direction”, presumably upwards if Brexit manages to pass smoothly.

Market Reaction

Spot gold is posting gains today, last trading at $1,260.78/oz and up 0.69% with a high of $1,260.96/oz and a low of $1,241.92/oz. Sterling was also trading higher today on account of the lack of an additional rate hike from the BoE.