Bank set to keep rates at 0.75% as Brexit takes its toll

The Bank of England is expected to keep interest rates unchanged at 0.75% on Thursday, amid signs Brexit uncertainty is wreaking havoc on the economy.

The Bank’s latest rates decision comes just days after industry data showed output in Britain’s dominant service sector almost ground to a halt in January, reaching its lowest level for two-and-a-half years.

Economists said the figures suggested growth may flatline in the first quarter of 2019, following disappointing purchasing managers’ index (PMI) readings for the manufacturing and construction sectors in January.

Thursday’s noon decision from the Bank is set to see the Monetary Policy Committee (MPC) vote unanimously to hold rates, with experts saying policymakers are likely to hold off from raising rates for some time until Brexit clarity emerges.

The Bank’s accompanying quarterly inflation report will also be eyed closely for cuts to its 2019 growth forecast after the latest slew of gloomy reports.

Howard Archer, chief economic adviser to the EY Item Club, said: “The weakened set of January PMI’s leave little doubt that the Bank of England will remain firmly in ‘wait and see’ mode on monetary policy at February’s MPC meeting this week, and until after the Brexit situation becomes clearer.”

The uncertainty caused by Brexit appears to be weighing not just on businesses, but also consumers as retail and house purchases appear to be impacted.

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.

Chris Williamson, chief business economist at IHS Markit, said data suggests gross domestic product (GDP) stagnated in January after eking out growth of just 0.1% in the fourth quarter of 2018.

He said: “There is a heightened risk of the economy stagnating or even contracting in the first quarter, especially if Brexit uncertainty intensifies in the lead-up to March 29.”

The Bank – which forecast growth of 1.3% in 2018 and 1.7% in 2019 last November – cautioned at its rates meeting in December that Brexit uncertainties had “intensified” and were slamming the brakes on UK growth.

The Bank estimated 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 worsened, while the Bank and Governor Mark Carney have ramped up their warnings over the worsening outlook for the global economy, and China in particular.

Financial markets have cut nearly one full quarter point rate rise over the next two years since the last inflation report in November, factoring in just a 50/50 chance of one hike in 2019.

The pressure to raise rates has also eased as recent official figures showed inflation falling further in December, to 2.1% from 2.3% in November.

But Investec expects the Bank to tweak its forecast inflation to show a modest overshoot of its 2% target over the next two years as it remains concerned about domestic pressures, such as wages.

James Smith at ING added: “A rate hike in the first half of 2019 looks very unlikely, but further tightening later in the year shouldn’t be completely ruled out.

“With wage growth continuing to perform strongly, we sense that policymakers would like to raise rates again if they can.”