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The Bank of England (BoE) is expected to deliver a 25bp cut at its next 'big' meeting in January 2020, taking the Bank Rate to 0.50 percent, according to the latest research report from Danske Bank.
This forecast does not depend on the election outcome, although a cut would be more likely in the event of a hung parliament than otherwise. The market is pricing in a 33 percent chance of a cut in January.
It is believed to be a close call whether there will be another rate cut in the second half of 2020 but this is not yet the base case.
Whether or not a cut will come depends on Brexit and whether we are heading for a permanent US-China trade deal ahead of the US presidential election in November 2020 (50 percent probability of this happening). Given the high uncertainty about predicting the outcome of the upcoming UK election, it is a difficult call to make.
The Bank of England meeting summary concluded 'If global growth fails to stabilise or if Brexit uncertainties remain entrenched, monetary policy may need to reinforce the expected recovery in UK GDP growth and inflation', the report added.
On the positive side, there are early signs that China is stabilising and US data have also been better than expected but Europe is still struggling. On the negative side, GDP growth in Q3 was +0.3 percent q/q, slightly lower than the 0.4 percent expected by both the Bank of England and Danske Bank.
Private consumption is still growing at a decent pace and real wage growth is solid. However, recently we have become a bit concerned about the development in the labour market. Despite Brexit uncertainty and the investment recession, companies have continued hiring people, until now.
Although the jury is still out, the latest two jobs reports showed falling employment and soft indicators suggest this trend may continue.
"If this is the beginning of a new trend, this may start a negative downward spiral, which could lead to a more severe economic slowdown. In this case, we believe the Bank of England would be likely to cut the Bank Rate more quickly, down to zero percent, and probably restart QE," Danske Bank further commented in the report.
