Bank to hold rates steady as growth falters
Bank of England policymakers are set to keep interest rates on hold again this week, as economic growth slows sharply after a stock-building boost at the start of 2019.
The Monetary Policy Committee (MPC) is seen keeping rates at 0.75% once more in Thursday’s noon decision, which comes after the latest official figures showed the economy shrank by a worse-than-feared 0.4% in April.
But MPC members have been banging the drum for the need to raise rates if the Government secures a smooth Brexit – which is the scenario on which it has based all its forecasts.
Ben Broadbent, deputy governor for monetary policy, and fellow MPC member Michael Saunders, told MPs on the Treasury Select Committee that financial markets are not pencilling in rate hikes soon enough.
This follows similar comments from Bank governor Mark Carney at the May inflation report, when he said investors were wrong to price in just one rise over the next three years.
Inflation has also moved up from recent lows, increasing to 2.1% in April against 1.9% in March.
But economists believe the Bank will sit on its hands until the Brexit outcome is clear.
Howard Archer, chief economic adviser to the EY Item Club, said: “April’s sharp dip in GDP and soft May surveys reinforces belief that the Bank of England will maintain a cautious “wait and see” approach on interest rates amid heightened economic, political and Brexit uncertainties.
“We believe the Bank of England is likely to keep interest rates at 0.75% through 2019.”
Philip Shaw at Investec added: “With no urgency to tighten policy again, the committee would probably want to avoid making a policy move now which it might well have to reverse relatively soon afterwards.”
In May, the Bank upped its forecasts for UK growth to 1.5% this year, up from the paltry 1.2% predicted in February thanks largely to a more stable global economic outlook.
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.
Growth accelerated to 0.5% in the first quarter thanks to stockbuilding ahead of the original March 29 Brexit deadline.
But the monthly GDP figures for April confirmed expectations that this would quickly unwind in the second quarter.
A 24% slump in car production was largely behind the April contraction, while the services sector recorded its lowest three-month growth since this time last year, climbing just 0.2%.
Recent purchasing managers index (PMI) surveys have also pointed to a mixed May, with output contracting across manufacturing and construction, but activity edging up across the services sector.
And the global economic outlook has also become “murkier”, according to Mr Shaw.
He said: “Our central view is that the UK leaves the EU at the end of March 2020 and that the MPC eventually raises rates again the following November.
“We cannot pretend that there is any degree of inevitability here, bearing in mind the all-enveloping dark cloud of uncertainty.”