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Bank of England surprises as two officials back rate cut

By David Milliken and Andy Bruce
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Bank of England surprises as two officials back rate cut

FILE PHOTO: Bank of England Governor Mark Carney attends a Bank of England news conference, in the City of London

By David Milliken and Andy Bruce

LONDON (Reuters) - Two Bank of England officials unexpectedly voted to lower interest rates on Thursday to ward off an economic slowdown, and others including Governor Mark Carney said they would consider a cut if global and Brexit headwinds do not ease.

Economists polled by Reuters had expected the BoE to vote unanimously to keep Bank Rate at 0.75%, and the announcement of the 7-2 split pushed sterling to a two-week low as market odds on a cut next year rose as high as 80%.

To date, the BoE has resisted following the U.S. Federal Reserve and the European Central Bank in cutting its main interest rate, but Thursday's Monetary Policy Report positions the BoE for a change in stance.

Carney said the BoE's central scenario was that a slowdown in global growth would stabilise and that Prime Minister Boris Johnson's Brexit deal -- which parliament has yet to approve -- pointed the way to a reduction in Brexit uncertainty.

If this scenario unfolds, the BoE would still be able to stick to its long-standing message about limited and gradual rate hikes.

But if the outlook deteriorates, the BoE said a rate cut would become more likely.

"These are pretty big tectonic forces operating right now," Carney told reporters. "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."

For Monetary Policy Committee members Michael Saunders and Jonathan Haskel, it was already time to act -- they cast the first votes for a rate cut since shortly after the 2016 Brexit referendum.

"In the short term at least, it seems the MPC is more concerned about the downside risks to growth and is prepared to pull the trigger on a rate cut if and when these risks materialise," PwC economist John Hawksworth said.

The BoE is also grappling with uncertainty about an election which Johnson has called for Dec. 12, in a bid to get a majority to pass his Brexit deal before a new deadline of Jan. 31.

The two main political parties are promising to end years of austerity and spend billions on infrastructure -- aided by record-low interest rates -- to try to fuel growth.


JOB MARKET WORRIES

Saunders and Haskel noted reduced job vacancies that suggested Britain's hitherto strong labour market was weakening as well as risks from the world economy and Brexit.

Other MPC members showed a new openness to cutting rates if things soured. They also softened their language on the need for limited and gradual rate hikes in the medium term, saying they "might" rather than "would" be necessary.

But economists at HSBC said a rate cut was not a certainty, as some policymakers looked concerned about rising labour costs.

"As we think may be the case for other central banks, uncertainties and divisions may mean the ultimate outcome is to stay on hold," HSBC's Simon Wells and Chris Hare wrote.

The BoE as a whole painted a darker picture for Britain's economy over the next three years, predicting it will grow 1% less over the period than it had forecast in August, mostly due to a weaker global economy and a recently stronger pound.

But part of the growth downgrade reflected Johnson's Brexit plans.

The BoE now assumes Britain will strike a trade deal that leads to new customs checks and puts up barriers to exports of financial and legal services.

The growth forecast would have been weaker still without higher spending announced by the government in September which the BoE said would add 0.4% to the economy.

Inflation, currently 1.7%, is forecast to drop to 1.2% in the middle of next year due to lower oil prices and regulatory caps on electricity and water bills.

But over the next couple of years, the BoE sees economic growth picking up from 1.4% in 2019 to 2.0% in 2022. The 2022 growth rate is above Britain's long-term trend and would push inflation back above the BoE's 2% goal, the central bank said.


(Additional reporting by Rahul Karunakar; Editing by William Schomberg and Catherine Evans)