Bank keeps rates at 0.75% as Brexit stockpiling boost likely to be short-lived
The Bank of England has held interest rates at 0.75% as it revealed a growth spurt thanks to Brexit stockpiling, but cautioned the boost will prove to be temporary as uncertainty reigns.
Policymakers on the Monetary Policy Committee (MPC) voted unanimously to hold rates in the first decision since the Government secured a six-month delay to EU withdrawal.
In minutes of the decision, the Bank said it now expects growth to surge to 0.5% between January and March, up from 0.2% in the final quarter of 2018, after firms stockpiled heavily in the run up to the original March 29 Brexit deadline.
But it warned the fillip with fade fast, with growth set to slow sharply to 0.2% in the second quarter and remain “subdued” in the face of Brexit uncertainties.
It said the Brexit delay to October 31 will only prolong the slump in business investment, which has been falling for a year as firms put spending decisions on hold amid uncertainty over a Brexit deal.
Financial markets are now not expecting interest rates to rise until the end of 2021, having previously pencilled in one rise a year, although the Bank signalled a hike may need to come sooner to keep inflation to the 2% target.
It reiterated that gradual and limited rises were likely over the next three years, but that they could go in either direction in response to Brexit.
In its accompanying quarterly inflation report, the Bank hiked its growth forecasts – to 1.5% this year, up from the paltry 1.2% predicted in February.
It also increased its gross domestic product (GDP) growth outlook to 1.6% in 2020 and 2.1% in 2021, up from 1.5% and 1.9% previously.
But this was only due to a better outlook ahead for the global economy and easing financial conditions worldwide.
The Bank said: “The underlying pace of GDP growth appeared to be slightly stronger than previously anticipated, but marginally below potential.
“That subdued pace reflected the impact of the slowdown in global growth and ongoing Brexit uncertainties.”
It added: “As new Brexit deadlines approached, it was possible that businesses would continue to worry about adverse outcomes and delay capital spending as they waited for a resolution to emerge.”
Consumer spending is holding up well, however, according to the Bank, despite easing conditions in the property market.
More businesses are also now prepared for a possible no-deal Brexit, with Bank survey results showing two-thirds of firms are prepared, although many of those believe they are as “ready as they can be”.
In a worrying sign for the economy, firms have informally told the Bank they do not plan to restart spending while the Brexit uncertainty continues.
But the Bank said evidence suggested companies were hiring staff instead of making capital investments as they waited for Brexit clarity.
The Bank’s rates announcement comes after the Treasury announced last week it had kicked off the hunt to find a replacement for Bank Governor Mark Carney.
It is using a headhunter for the first time to search for his successor ahead of his departure next January.