Bank slashes growth outlook to weakest for 10 years as it holds interest rates
The Bank of England has warned Brexit uncertainty is set to see growth slump to its lowest level for 10 years in 2019, as it held interest rates at 0.75%.
The Bank slashed this year’s growth forecast to 1.2% – the lowest since 2009, when the economy contracted by 4.2% at the height of the recession following the financial crisis.
Its shock downgrade compares with 1.7% predicted in November, while the Bank also cut its outlook for 2020 to 1.5%.
The gloomy growth outlook came as policymakers on the nine-strong Monetary Policy Committee (MPC) voted unanimously to keep rates unchanged.
The Bank’s quarterly inflation report also signalled rates may not rise until the second half of 2020 as Brexit worries have seen businesses freeze spending, while it warned consumer confidence had “weakened significantly”.
Sterling tumbled on the news and was trading 0.6% down versus the US dollar at 1.285.
Against the euro, the pound was down 0.3% at 1.134.
In minutes of the latest rates decision, the Bank said: “Since the Committee’s previous meeting, key parts of the EU withdrawal process had remained unresolved and uncertainty had intensified.
“Businesses had appeared increasingly to be responding to Brexit-related uncertainties and there were signs that those uncertainties might also be affecting household spending and saving decisions.”
The Bank said growth was likely to have halved to 0.3% in the fourth quarter of 2018, down from 0.6% in the previous three months and estimated it will fall again to 0.2% in the first quarter of 2019.
This is being driven by sharp falls in business investment, as well as a drop in consumer spending and signs of a weaker UK housing market.
A sharper-than-expected slowdown in the global economy is also impacting UK growth, according to the Bank.
But it said the growth hit was expected to be short-lived, with a recovery in expansion later in 2019 – though this is based on a Brexit deal being reached by March 29.
It forecasts output expanding by a healthier 1.9% in 2021.
“A period of softer growth domestically and in the rest of the world was likely to be prove only temporary,” the Bank said.
In its accompanying quarterly inflation report, the Bank outlined the volatility of its forecasts depending on Brexit fears, estimating growth could be 1.5% higher over the next three years – at a potential 1.6% in 2019 – if a favourable deal is reached and uncertainty disappears.
The Bank said on the flip side, growth could slump to a potential 0.8% in 2019 should uncertainty persist and financial conditions tighten.
In its minutes, the Bank continued to stress that interest rate rises were likely to be needed “at a gradual and to a limited extent” to bring inflation back to target by 2022.
It forecasts recent drops in oil prices to see inflation – currently at 2.1% – ease back below its 2% target for much of 2019, but pick up again further out due to domestic pressures, such as wage growth.
But financial markets are only pencilling in one rate rise over the next three years, having previously predicted one next year and another at the beginning of 2021.