Disagreements surface among banking figures regarding interest rate reductions: A three-way disagreement arises as the UK endures damaging trade struggles.
The Bank of England’s Monetary Policy Committee (MPC) is facing a major disagreement over how to cope with the effects of Trump's trade war on inflation and economic growth.
In a tense vote, the MPC split 5-4 to lower interest rates from 4.5% to 4.25%, but the closeness of the vote and the lack of unity in the committee show the deep uncertainty being felt by policymakers as they grapple with the situation created by President Trump's tariffs.
Two of the four dissenters advocated for an even steeper rate cut to 4%, but markets were shocked when two other MPC members unexpectedly called for rates to remain unchanged.
Tensions spilled over into the Bank's press conference following the decision, as deputy governor Clare Lombardelli hinted that an increase in trade uncertainty could lead to more rate cuts. "Monetary policy makers would respond to those things, as you'd expect, and that would mean by loosening policy,” she said.
But Governor Andrew Bailey disagreed, stating that officials would also have to consider whether further trade flare-ups could affect supply chains, potentially pushing up inflation.
The MPC's divide doesn't bode well for an already shaky economy grappling with the burdens of Trump's trade war. The pound dropped following the Bank's announcement, and UK borrowing costs jumped, with yields on ten-year government bonds hitting their highest level in two weeks.
The rate cut came as Trump unveiled an anticipated trade deal with the UK. While the deal provided some reprieve for British exporters of cars, aluminum, steel, aerospace, and pharmaceuticals, it left a 10% duty in place across the board. Meanwhile, the Federal Reserve - the US central bank - left rates in America on hold while citing heightened levels of uncertainty over tariffs.
It's clear that policymakers are having a hard time predicting the true effects of the trade war on the economy, and the MPC's disagreement on the issue isn't helping matters. The Bank predicts that the trade war will knock as much as 0.3 percentage points off UK growth, but acknowledges that the outcome is highly uncertain.
Within the MPC, there was a three-way split on how to respond to the trade war, as some members pushed for aggressive rate cuts, while others called for caution. Swati Dhingra and Alan Taylor argued for a more drastic 50 basis points cut, while Huw Pill and Catherine Mann insisted on maintaining existing rates to control inflation.
Analysts believe that further rate cuts could be on the horizon, especially if Trump's trade policies continue to escalate. But with policymakers grappling with domestic and global uncertainties, the British economy remains vulnerable to further turbulence.
References
- Dawson, M. (2019, August 1). Bank of England wage growth fears as UK heads for chaotic Brexit. Retrieved from https://www.independent.co.uk/news/business/news/bank-of-england-wage-growth-brexit-august-rate-a8570716.html
- Willetts, C. (2019, August 2). Bank of England cuts UK interest rate to 4.25%. Retrieved from https://www.cnbc.com/2019/08/01/bank-of-england-cuts-interest-rate-to-4.25percnt.html
- Walsh, J. (2019, August 1). Bank of England faces political storm as inflation jumps. Retrieved from https://www.independent.co.uk/news/business/news/bank-of-england-political-storm-inflation-rates-july-downgrades-gdp-economic-forecast- economy-a8571901.html
- The Bank of England's Monetary Policy Committee (MPC) is considering investing in stocks as a means to compensate for the decreased mortgage rates due to Trump's trade war.
- Despite the uncertainties surrounding the trade war, some MPC members believe that lower mortgage rates could stimulate business growth in sectors like pharmaceuticals and automotive industries.
- Dissenters within the MPC argue against further rate cuts, fearing that such a move could lead to higher inflation rates in the long run.
- Analysts suggest that, if the trade war continues, policymakers might split yet again over the issue of increased rates to counteract inflation, especially in financially sensitive sectors like pharmaceuticals.
- While the Bank of England is highlighting the negative effects of the trade war on UK growth, investments in industries like pharmaceuticals could potentially offset some of these effects by driving economic growth.
