UK inflation slowdown ramps up view a rate cut is imminent

Bloomberg

The path to a Bank of England (BOE) interest-rate cut as soon as this month became clearer on Wednesday after inflation unexpectedly slowed to a three-year low.
The pound fell and traders increased bets that policy makers would reduce rates on January 30, as the shock reading reinforced speculation fuelled by dovish comments from BOE Governor Mark Carney and others in recent days. Less than an hour earlier, BOE policy maker Michael Saunders, who’s been voting for lower rates, said the UK economy needs an injection of stimulus to avoid a prolonged period of below-target inflation.
UK consumer prices rose 1.3% from a year earlier, the least since November 2016, while the core rate also declined. Headline inflation has been below the BOE’s 2% target since August and economists expect it to continue to undershoot until at least the middle of next year, thanks in part to the appreciation of sterling in 2019.
Expectations of a rate cut have rippled through markets, pushing the pound down almost 2% since the start of the year. The currency fell further on Wednesday, dropping 0.2% to $1.2995.
Traders are now pricing in a more than 60% chance of a cut in January, up from 44% on on January 14. A move by May is now almost fully priced in.
A key date in the debate over the rate-cut timing is January 24, when Purchasing Managers Indexes will provide an overview of the economy at the start of 2020.
In a speech on Wednesday, Saunders said that a sluggish economy and evidence of a weakening labour market will likely lead to a longer period of subdued growth. That would create a disinflationary, and persistent, output gap, an the risk warrants a “relatively prompt and aggressive response.”
Saunders is one of two dissenting voters on the BOE’s nine-member Monetary Policy Committee. He’s been calling for an immediate 25 basis point rate cut since November, citing downside risks from a weaker global outlook and from more persistent Brexit uncertainties affecting corporate and household spending.
“If we defer easing near term and, in the event of persistent economic weakness, face the need for greater easing later on, then risks of a low inflation trap — which would certainly not be a benign outcome — would rise,” Saunders said.
In response to questions after the speech, Saunders said that U.K. data currently justify a rate cut and the BOE has the tools to boost growth.
That view appears to have been gaining traction with his colleagues. In his first major speech of 2020, outgoing Governor Carney said the MPC has plenty of firepower to aid the economy if necessary.
Policy maker Silvana Tenreyro followed by saying she may support a rate cut in the next few months if sluggish global growth and Brexit uncertainty persist. Another member, Gertjan Vlieghe, said he’d need to see an improvement to justify waiting to cut.
Saunders warned that Brexit risks will persist in 2020 as the U.K. negotiates its future relationship with the European Union. He also dismissed the possibility that moving too quickly to cut rates raised the possibility of a policy mistake.
“Of course, it is possible that we cut rates now and then find that the economy rebounds and renewed tightening is appropriate, say a year from now,” Saunders said. “I don’t think such a quick reversal is likely, but it is not inconceivable. I would not regard such a reversal, if it occurs, as a policy failure. It would be a benign outcome: monetary policy would have helped underpin the pickup.”

‘UK needs aggressive response to risks’
Bloomberg

The UK economy needs an injection of stimulus to avoid a prolonged period of below-target inflation, according to Bank of England policy maker Michael Saunders, one of the leading officials calling for lower interest rates.
In a speech on Wednesday Saunders said that a sluggish economy and evidence of a weakening labor market will likely lead to a longer period of subdued growth. That would in turn create a disinflationary, and persistent, output gap. The risk warrants a “relatively prompt and aggressive response,” he said.
Saunders is one on two dissenting voters on the BOE’s nine-member Monetary Policy Committee. He’s been calling for an immediate 25 basis point rate cut since November, citing downside risks from a weaker global outlook and from more persistent Brexit uncertainties affecting spending.
Governor Mark Carney said the MPC has plenty of firepower to aid the economy if necessary.

ness, face the need for greater easing later on, then risks of a low inflation trap — which would certainly not be a benign outcome — would rise,” Saunders said in Bangor, Northern Ireland.
That view appears to have been gaining traction with his colleagues. In his first major speech of 2020, outgoing Governor Mark Carney said the MPC has plenty of firepower to aid the economy if necessary. Policy maker Silvana Tenreyro followed by saying she may support a rate cut in the next few months if sluggish global growth and Brexit uncertainty persist. Another member, Gertjan Vlieghe, said he’d need to see an improvement to justify waiting to cut.
That shift has rippled through markets, pushing the pound down almost 2% since the start of the year and seeing traders price in an almost 50% chance of cut on Jan. 30.
While the pound stayed little changed after Saunders’s remarks, U.K. two-year notes edged higher, leaving the yield down two basis points at 0.47%.
The BOE was one of the few major central banks that didn’t join the global monetary policy easing of 2019. Hemmed in by Brexit uncertainty, it held fire through the political battles and tense negotiations, keeping its benchmark at 0.75% for more than a year.
In his speech on Wednesday, Saunders said that while political uncertainty in the U.K. has receded somewhat following last year’s election, growth may still be more sluggish than forecast by the BOE in November.
Brexit Risk
He also warned that Brexit risks will persist in 2020 as the U.K. negotiates its future relationship with the European Union, and dismissed the possibility that moving too quickly to cut rates raised the possibility of a policy mistake.
“Of course, it is possible that we cut rates now and then find that the economy rebounds and renewed tightening is appropriate, say a year from now,” Saunders said. “I don’t think such a quick reversal is likely, but it is not inconceivable. I would not regard such a reversal, if it occurs, as a policy failure. It would be a benign outcome: monetary policy would have helped underpin the pickup.”
While the U.K. is not currently in a low-inflation trap, “you just have to look across other major advanced economies to appreciate that the risk of being stuck in a low inflation trap, with a self-reinforcing circle of caution, sluggish growth and depressed inflation expectations, is not just a theoretical possibility,” he said.