The Bank of England is expected to keep interest rates unchanged on Thursday in its first meeting since Boris Johnson’s election victory, despite growth flat-lining in Britain’s Brexit-battered economy.
Economists predict the Bank’s Monetary Policy Committee (MPC) will vote to keep rates at 0.75% in the noon decision.
But it is likely two of the nine members will repeat their call for a cut to 0.5% after Jonathan Haskel and Michael Saunders dissented in November – which marked the first split decision on the MPC for more than a year.
The decision comes as recent official figures revealed the economy stagnated in October as Brexit and political uncertainty hampered activity, with more recent surveys confirming a worsening picture for growth.
Since then, the Conservatives’ triumph in the December 12 election has helped remove some of the clouds of political uncertainty and concerns over another Brexit deadline extension.
However, fears over a no-deal Brexit remain at the fore, with Mr Johnson legislating to prevent MPs from extending the Brexit transition period beyond the end of 2020.
Meanwhile, as the MPC meets to decide on its verdict, speculation is swirling over an imminent appointment to replace outgoing Bank governor Mark Carney.
Dame Minouche Shafik – a former deputy governor at the Bank and current director at the London School of Economics – has reportedly emerged as a leading favourite for the post, which could be announced within days, ahead of Mr Carney’s departure on January 31.
On this month’s rates decision, George Brown at Investec Economics said a “key consideration for the MPC’s deliberations this week will be the General Election outcome and its implications for Brexit”.
He added: “We look for the MPC’s broader easing bias to be maintained given that the risks to the outlook remain to the downside; a no-deal Brexit could still manifest itself as soon as the end of next year, whereas a re-escalation in the US-China trade dispute cannot be ruled out.”
The Bank had forecast a slowdown in growth to 0.2% in the final quarter, from 0.3% in the previous three months, but this is now looking optimistic given the month-on-month reading of zero expansion in October.
Inflation also held at 1.5% in November – way below the 2% target – which could give the MPC room to slash rates if needed to boost growth.
Investors believe there is a 40% chance of rates being cut in the next six months.
But Pantheon Macroeconomics is more upbeat over the economic outlook, forecasting growth to pick up to 0.4% in the first two quarters of 2020 and offering a “brief window of opportunity” for a rate hike.
Samuel Tombs, chief UK economist at Pantheon, said: “Domestically-focused firms will start to invest again, while sterling’s rise will begin to boost real incomes.
“If the MPC dithers, however, it will miss its summer window for a rate hike; Brexit risks will loom large in the second half of 2020.”