Bank to ‘sit on the sidelines’ amid Brexit uncertainty
The Bank of England is set to keep interest rates on hold once more next week as Brexit uncertainty continues to take its toll on the economy.
The Bank’s Monetary Policy Committee (MPC) is expected to vote unanimously to hold rates at 0.75%, with uncertainty weighing on the economy and consumers as Theresa May is forced back to the negotiating table with the EU after her withdrawal deal was rejected by MPs.
Thursday’s noon announcement will also be accompanied by the Bank’s quarterly set of economic forecasts, which will be watched closely for further signs of the damage inflicted by Brexit.
It cautioned at its last rates meeting in December that Brexit uncertainties had “intensified” and were slamming the brakes on UK growth.
The Bank estimated that UK growth was set to slow by more than previously expected to 0.2% in the final three months of the year, down sharply on 0.6% seen in the heatwave-boosted third quarter.
Since then, the economic signs have shown little improvement, while the Bank and Governor Mark Carney have ramped up their warnings over the worsening outlook for the global economy, and China in particular.
George Brown, an analyst at Investec, said that given this, rates are set to remain firmly on hold for now.
He said: “In the face of this Brexit ambiguity, we expect the MPC to judge that the best course of action at this juncture is to simply sit on the side-lines awaiting further clarity.”
Financial markets have also cut nearly one full quarter point rate rise over the next two years since the last inflation report in November.
This comes as recent data has pointed to an economy also in wait-and-see mode.
Britain’s powerhouse services sector saw business activity rise at one of the slowest rates for two-and-a-half years in December, according to the latest purchasing managers index.
The survey suggested that concerns over Britain’s departure from the EU affected businesses’ spending plans toward the end of last year, while consumer demand was more subdued, which hit sales.
Retail sales fell 0.9% in December after Black Friday brought spending forward to November, while there are also signs of sales stagnating in January.
But Investec is expecting little change in the Bank’s growth outlook since November, when it trimmed its forecast for growth overall in 2018 to 1.3%, while it also nudged its 2019 outlook down to 1.7%.
Mr Brown expects the Bank may tweak its forecast inflation, however, to show a modest overshoot of its 2% target over the next two years as it remains concerned about domestic pressures, such as wages.
This would come despite recent official figures showing inflation falling further in December, to 2.1% from 2.3% in November.
“Consequently, our expectation is that the MPC will still continue to judge that further rate hikes are necessary,” said Mr Brown.
Investec is forecasting another hike in May, depending on the outcome of Brexit, and another two, hitting 1.5% by May 2020.