Bank holds rates and slashes growth forecast in face of Brexit worries

The Bank of England has held interest rates firm at 0.75% and warned there was now a one-in-three chance of the economy shrinking at the start of next year as Brexit uncertainty takes its toll.

Members of the nine-strong Monetary Policy Committee (MPC) voted unanimously to keep rates unchanged as it said heightened no-deal Brexit fears had seen uncertainty among firms become “more entrenched”, which is hitting the wider economy.

In its quarterly inflation report accompanying the decision, the Bank slashed its growth forecast to 1.3% for both this year and next, down from the 1.5% and the 1.6% previously predicted.

In a warning shot, it also predicted a 33% chance that annual growth will be below zero in the first quarter of 2020 even without a cliff-edge EU withdrawal.

The MPC cautioned that in the event of a no-deal Brexit, “the sterling exchange rate would probably fall, CPI inflation would rise and GDP growth slow”.

It reiterated that rates could go in either direction as it would need to balance the need to cool inflation caused by the plunging pound, while also providing support for a flagging economy.

The pound has already tumbled by 6% since the Bank’s last inflation report in May as no-deal fears mount.

UK growth is also being hit hard as businesses hold back on investment due to Brexit uncertainty, which is coming at a time of slowing global economic conditions amid trade tensions between the US and China.

The Bank confirmed it now expects UK gross domestic product (GDP) to flatline in the second quarter, down from 0.5% growth between January and March.

The Bank upped its UK growth outlook to 2.1% in 2021, though it admitted its forecasts were heavily skewed by financial markets now pencilling in a rate cut to 0.5% in the first half of 2020 as they see a 50/50 chance of a no-deal Brexit.

The Bank’s forecasts are otherwise based on a smooth Brexit deal, which is increasingly looking unlikely as new Prime Minister Boris Johnson takes a hardline stance in negotiations with the EU ahead of the October 31 deadline.

In a smooth Brexit deal scenario and recovering global economy, the MPC repeated its mantra that “gradual” and “limited” rate rises would be needed.

The Bank’s inflation report added that in a smooth Brexit deal scenario, even if rates were to rise twice to 1.5% by the third quarter of 2022, it was still likely that borrowing costs would need to rise further to rein in inflation.

The Bank said in the minutes: “Increased uncertainty about the nature of EU withdrawal meant that the economy could follow a wide range of paths over coming years.”

“The monetary response to Brexit, whatever form it took, would not be automatic and could be in either direction,” it added.

The report showed the toll being taken on UK businesses, with recent surveys showing that firms expect investment to remain weak for the next year even if a Brexit deal is reached.

But consumer confidence and spending has remained “resilient”, while house prices have not been as weak as expected recently, according to the Bank.

The rates decision comes after the US Federal Reserve voted to reduce its benchmark interest rate by a quarter point late on Wednesday – America’s first cut since 2008.

US policymakers voted for the cut as they look to offset the hit from a slowing global economy, its trade dispute with China and slowing inflation.