January 13, 2020 / 11:46 AM / 8 days ago

Breakingviews - Mark Carney has reason to ease before he leaves

Mark Carney, Governor of the Bank of England speaks at a Bank of England Financial Stability Report news conference in London, Britain December 16, 2019.

LONDON (Reuters Breakingviews) - Mark Carney may leave his successor a timely handover present. Britain’s weak economic performance gives the Bank of England governor a reason to cut interest rates at the end of January, before making way for Andrew Bailey in March. It also allows the United Kingdom to catch up with the easing the U.S. Federal Reserve and the European Central Bank delivered last year.

Delaying a rate cut until after Bailey takes over would be risky. UK gross domestic product shrank 0.3% in November from the previous month and grew just 0.6% from a year earlier, the slowest annual pace since 2012, the national statistics office said on Monday. Even rolling three-month GDP estimates, which are less volatile than monthly figures, were weak and slowed for the second month in a row.

It’s true that business optimism has perked up a bit since Prime Minister Boris Johnson’s unexpectedly large election win in December. For example, the business expectations component of the IHS Markit/CIPS UK Services Purchasing Managers’ Index hit its highest level since September 2018, a report showed last week. Even so, the overall PMI reading for the dominant service sector only improved to 50. That’s consistent with economic stagnation in the fourth quarter.

Granted, uncertainty over the outcome of Brexit meant UK rate-setters had a reason to wait. A disorderly departure from the European Union might have pushed sterling down a lot and caused a spike in import prices that would jeopardise their 2% inflation target. They may also have wanted to keep ammunition in reserve to combat any sharp downturn.

While the Bank of England was sitting on its hands, though, the Fed and the ECB both eased policy. And Johnson’s win means Britain will leave the EU in an orderly fashion on Jan. 31. While the country’s future trading relationship with the EU remains uncertain, that won’t become clearer until later in the year. Carney can therefore reverse the 2018 tightening, which saw the UK policy rate rise to 0.75% from 0.5%, and still leave Bailey room for further cuts. Doing so now avoids the new boss starting on the defensive.

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


Sign up for a free trial of our full service at https://www.breakingviews.com/trial and follow us on Twitter @Breakingviews and at www.breakingviews.com. All opinions expressed are those of the authors.

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below