Bank to ‘sit tight’ on interest rates amid Brexit ‘fog’

The Bank of England is expected to hold interest rates at 0.75% once more on Thursday as Brexit uncertainties reach their peak.

With still no clear sight of the Brexit outcome just over a week before the planned March 29 EU exit date, members of the Bank’s nine-strong Monetary Policy Committee (MPC) are set to vote unanimously to leave rates unchanged.

Experts believe policymakers will remain firmly in wait-and-see mode for some time until there is greater clarity.

But the decision comes after a better-than-expected set of employment and wages data on Tuesday, which some economists have said bolsters the case for a rate rise later in the year, should there be a lengthy Brexit delay or if a deal is eventually struck.

Yet with inflation still below target at 1.9% in February and economic growth set to remain weak in the first quarter of 2019, there is little chance the Bank will look to make any moves until some of the damaging uncertainty over Brexit is lifted.

Or, as Bank Governor Mark Carney recently put it, the “fog” of Brexit, which is weighing heavily on growth.

Howard Archer, chief economic adviser to the EY Item Club, said: “Despite robust employment growth and firm pay, there looks to be zero prospect that the Bank of England is going to act on interest rates until the Brexit situation is resolved and it can see how the economy is being affected.

“With Brexit now looking most likely to be delayed until at least 30 June – and very possibly significantly later still – and the economy looking soft overall in the first quarter, we believe that it is ever more likely that the Bank of England will sit tight on interest rates through 2019 – assuming that the UK ultimately leaves the EU with a ‘deal’.”

Bank of England
Bank of England

The rates outlook would alter dramatically should there be a no-deal scenario, with most economists expecting a cut despite the Bank’s repeated warnings that policy could move in “either direction”.

Recent data has pointed to economic growth stalling at 0.2% in the first quarter, unchanged on the previous three months as Brexit uncertainty has seen sharp falls in business investment.

The recent official data revealed a 0.5% month-on-month rise in January in a rebound after a 0.4% fall in December, but growth edged just 0.2% higher overall in the three months to January.

Closely-watched purchasing managers’ index surveys have also signalled growth easing back to just 0.1% between January and March, while the latest manufacturing poll from the CBI on Wednesday showed the weakest activity since last May.

It also showed that a quarter of manufacturers were actively stock-building in preparation for a possible no-deal.

The Bank and independent forecasters at the Office for Budget Responsibility have both downgraded the growth outlook to the weakest for a decade in 2019, at 1.2% this year.

There is some hope of a marginal bounce-back should a Brexit deal be struck and business investment recovers, but Mr Carney and many other economists have been quick to warn that uncertainty will remain for some time yet even if an agreement is secured.

James Knightley, an economist at ING, is less gloomy on the prospects.

He said the better-than-expected 222,000 rise in employment in the recent data, the 3.4% rise in wage growth, and the fact that the UK’s jobless rate has fallen below 4% for the first time since 1975 cannot be ignored.

He said: “The UK labour data looks astonishingly strong for an economy that is supposedly slowing on most other measures.

“If the Government gets a long Brexit extension, a Bank of England rate hike is clearly on the table for the summer.”