Bank of England expected on response to Brexit psychodrama

The Bank of England is expected to announce the continuation of its current monetary policy on Thursday, but could be concerned about the turn Brexit is taking in an economic environment ravaged by the novel coronavirus pandemic.

The institution, which met on Wednesday, is due to announce its decision on Thursday at 11:00 GMT (13:00 in Paris).

For observers, the Bank of England (BoE) should keep its key interest rate at 0.1%, a historic low set in the midst of the Covid-19 pandemic, and its asset buyback program, increased to 745 billion pounds (around 810 billion euros) in June.

However, “the increase in Brexit uncertainty and the rebound of Covid-19 in the UK and Western Europe, pave the way for a potential surprise,” said Fawad Razaqzada, analyst for Think Markets .

According to him, if there is an unexpected announcement, it will take the form of clear signals sent to the market regarding future monetary easing.

“The Bank of England should announce new asset buybacks around 100 billion pounds (but) probably in November or December,” and not Thursday, said Howard Archer, economist at EY Item Club.

Negotiations over the post-Brexit relationship between the UK and the EU took a dramatic turn last week, when Boris Johnson’s government confirmed its willingness to change the Brexit deal reached last year , in violation of international law. The initiative made Europeans leap, threatening the UK with legal action.

The text reverting to provisions concerning Northern Ireland and intended to guarantee peace, on Monday crossed a first obstacle in the British Parliament despite the sling of part of the conservative camp. However, the rest of the parliamentary progress of the project looks more uncertain.

This issue further poisoned the already very difficult trade negotiations and increased the risk of a “no deal” at the end of the year, synonymous with customs duties and border controls. These fears have already spilled over into the pound sterling, which fell last week against other major currencies.

A failure of trade negotiations would indeed potentially be very costly for many sectors, as worried by sector representatives and business circles.

– Unemployment rising, inflation falling –

The Bank of England could therefore have to prepare to act in reaction to such a hypothesis, which is officially not part of the scenario on which it bases its forecasts, especially as unemployment begins to rise across the Channel in the face of the impact of the covid-19 pandemic.

The unemployment rate reached 4.1% on a sliding average over the three months ended at the end of July, against 3.9% over the three ended at the end of June. And economists and business circles fear a wave of layoffs at the end of October when the partial unemployment program put in place by the Treasury will end.

The prospect of negative interest rates, which has fueled speculation in recent months, could also be raised again, although the Bank of England has already expressed its reluctance on this subject. According to several analysts, it is unlikely that the BoE will take this path, due to the negative consequences for the financial sector.

On the other hand, the hypothesis of a rate hike before several months, or even several years, is almost zero when inflation is very far from the target of 2%, which the monetary institute aims.

Inflation took a big hit in August, to 0.2% from 1% in July, mainly due to a government program to subsidize meals eaten in restaurants to boost the sector.

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