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Bank of England trims growth outlook, holds rates as Brexit looms
LONDON, Nov 2, 2018 (BSS/AFP) – The Bank of England on Thursday trimmed its
growth forecasts as Brexit approaches and froze interest rates — but warned
it could alter monetary policy “in either direction” after Britain leaves the
European Union.
The central bank’s nine-strong Monetary Policy Committee (MPC) voted
unanimously at a regular policy meeting to keep its key rate at 0.75 percent
and maintain its quantitative easing stimulus, it announced in a statement.
The BoE predicted the economy will expand by 1.3 percent this year in a
downgrade of prior guidance of 1.4 percent, blaming slowing global economic
growth.
It now expects gross domestic product (GDP) to increase by 1.7 percent in
2019, the year in which Britain will leave the European Union. That was down
from 1.8 percent forecast previously.
The institution had last hiked rates in August by a quarter-point to help
tame Brexit-fuelled UK inflation, and remains in wait-and-see mode.
Sterling hit a fresh one-week peak at $1.2934 on the news, having rebounded
on reports of a post-Brexit financial services deal.
– Outlook ‘depends significantly’ on Brexit –
The forecasts are based on the assumption of a smooth transition period,
but there is growing unease on markets about a chaotic no-deal Brexit amid
stalled talks between Brussels and London.
“The economic outlook will depend significantly on the nature of EU
withdrawal, in particular the form of new trading arrangements, the
smoothness of the transition to them and the responses of households,
businesses and financial markets,” the BoE said, echoing its previous
remarks.
“The implications for the appropriate path of monetary policy will depend
on the balance of the effects on demand, supply and the exchange rate.
“The MPC judges that the monetary policy response to Brexit, whatever form
it takes, will not be automatic and could be in either direction.
“At this meeting the MPC judged that the current stance of monetary policy
remained appropriate.”
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Nevertheless, the bank warned that business investment has screeched to a
complete halt overall this year as uncertainty wreaks havoc on company
spending decisions.
And it reiterated its stance that monetary policy would gradually tighten
over the forecast period in order to return inflation to its 2.0-percent
target.
UK annual inflation slid to 2.4 percent in September on falling food
prices, from a six-month high of 2.7 percent in August.
The BoE also highlighted downside risks for the global economy, including
tightening financial conditions in emerging markets, slowing eurozone growth
— and trade war tensions that may yet escalate further.
Thursday’s news come just days after the UK government ramped up its 2019
growth outlook to 1.6 percent, from 1.3 percent.
But finance minister Philip Hammond had also cut his 2018 growth guidance
to 1.3 percent from 1.5 percent in his annual budget statement on Monday.
– Financial services deal? –
The pound soared earlier Thursday after The Times reported that London and
Brussels have agreed a preliminary deal that would see UK financial services
retain access to European Union markets after Brexit.
British and EU negotiators have struck a tentative agreement on all aspects
of a future partnership on services and the exchange of data, the daily
newspaper said, citing UK government sources.
Brexit minister Dominic Raab believes a divorce deal with the European
Union could be struck by November 21, but EU leaders warn that this would
require a breakthrough within days.
Britain is scheduled to leave the EU at the end of March 2019.
BoE governor Mark Carney has already stated that rates could go up or down
in the event of a cliff-edge Brexit.
Despite the bump higher in the pound, markets were underwhelmed by the
news, according to Laith Khalaf, analyst at stockbroker Hargreaves Lansdown.
“The Bank of England has left interest rates on hold, surprising precisely
no-one,” lamented Khalaf.
“A fragile UK economy, softening global demand, and the looming shadow of
Brexit leaves little scope for the central bank to do anything more than sit
on its hands for the time being.”
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