Bank of England stands pat on rates, warns over Brexit delay
The Bank of England stood pat on interest rates on Thursday, as widely expected, as it warned over the impact of slowing growth and Brexit uncertainty.
The central bank voted unanimously to leave interest rates at 0.75% and the asset-purchase programme at £435bn.
In its statement, the BoE said the UK would avoid a recession this year but sounded a cautious note over Brexit and slowing growth.
"For most of the period following the EU referendum, the degree of slack in the UK economy has been falling and global growth has been relatively strong," the BoE said.
"Recently, however, entrenched Brexit uncertainties and slower global growth have led to the re-emergence of a margin of excess supply. Increased uncertainty about the nature of EU withdrawal means that the economy could follow a wide range of paths over coming years. The appropriate response of monetary policy will depend on the balance of the effects of Brexit on demand, supply and the sterling exchange rate."
It also warned over the impact of another Brexit delay.
"It is possible that political events could lead to a further period of entrenched uncertainty about the nature of, and the transition to, the United Kingdom’s eventual future trading relationship with the European Union.
"The longer those uncertainties persist, particularly in an environment of weaker global growth, the more likely it is that demand growth will remain below potential, increasing excess supply. In such an eventuality, domestically generated inflationary pressures would be reduced."
In the event of a no-deal Brexit, the BoE expects sterling to drop, inflation to rise and GDP growth to slow. In this scenario, interest rates could rise or fall as the bank looks to balance the upward pressure on inflation from the likely fall in sterling and any reduction in supply capacity, with the downward pressure from any reduction in demand.
If the UK was headed towards a smooth Brexit, and assuming some recovery in global growth, the BoE expects demand to rise, which in turn would lead to higher rates.
Thomas Pugh, UK economist at Capital Economics, said that given the drop in GDP in the second quarter, the fall in core inflation to an almost three-year low in August and the ongoing Brexit drama, there was never much chance that the MPC would raise interest rates from 0.75% today.
"And even though the tone of the minutes was slightly more dovish than in August, we do not expect the MPC to follow in the footsteps of the Fed and the ECB and loosen policy unless there is a no deal Brexit," he said.
"Even if there were a Brexit deal at the end of October, with inflation well below the 2% target, the MPC is unlikely to feel under much pressure to rush ahead with rate hikes. Indeed, we think that the MPC would hold fire until the second half of next year. If there is a no deal then the MPC would probably quickly change its tune and support the economy by cutting interest rates."
Artur Baluszynski, head of research at wealth management firm Henderson Rowe, said: "Absent currency or balance of payments crisis, we just don’t see the Bank of England even considering raising rates anytime soon. Cuts are increasingly likely due to the prolonged uncertainty around Brexit. In fact, considering how sensitive the UK banking system is to softening house prices, we wouldn't be surprised if the Bank of England gets ahead of the curve."
The EY Item Club said it had previously expected a 25 basis point interest rate hike to 1.00% to occur in the second half of next year but now suspects that below-trend UK growth and a very challenging global economic environment will result in the BoE holding fire.
"Bank of England inaction on interest rates would be in marked contrast to the loosening cycle in monetary policy increasingly being adopted by global central banks, the latest example being the substantial stimulus measures announce by the European Central Bank on 12 September. We are dubious that the Bank of England will cut interest rates unless the UK economy takes a major downward lurch given the tightness of the labour market and the fact that fiscal policy is set to be loosened appreciably."