Interest rates to be kept at 0.75% amid slowing growth
Bank of England policymakers are set to hold interest rates again on Thursday as economic growth slows sharply after a stock-building boost at the start of 2019.
The Bank’s nine-strong Monetary Policy Committee (MPC) is set to keep rates at 0.75% once more in the noon decision, which comes after the latest official figures showed the economy shrank by a worse-than-feared 0.4% in April.
Data on Wednesday showing inflation fell to the 2% target in May from 2.1% in April has also given the Bank some breathing space to keep rates unchanged.
But MPC members have been banging the drum for the need to raise rates soon.
The Bank’s chief economist Andy Haldane said last weekend that the time was nearing “when a small rise in rates would be prudent to nip any inflationary risks in the bud”.
Ben Broadbent, deputy governor for monetary policy, and fellow MPC member Michael Saunders, have also recently 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.
Economists believe that despite the hawkish comments from the Bank, it will sit on its hands until the Brexit outcome is clear.
Howard Archer, chief economic adviser to the EY Item Club, said: “With the economy clearly having a difficult second quarter and likely to be hampered by prolonged Brexit uncertainties, we believe the odds strongly favour the Bank of England keeping interest rates at 0.75% through 2019.”
Investec is not pencilling in a rise until November 2020, given the “relatively benign inflation backdrop” and Brexit uncertainty.
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 – though its forecasts are all based on a smooth Brexit with a transition agreement.
Growth accelerated to 0.5% in the first quarter thanks to stock-building 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.