Rates to remain unchanged in final MPC meeting before Brexit deadline
Bank of England policymakers are set to leave interest rates on hold at 0.75% this week in their final monetary policy meeting before the UK is due to leave the EU on October 31.
The Monetary Policy Committee (MPC) decision at noon on Thursday comes amid mounting political chaos over Brexit and no further clarity over the outcome by the deadline next month.
But it does follow some brighter news on the UK economy after official figures showed gross domestic product (GDP) grew by a better-than-expected 0.3% month-on-month in July.
This raised hopes that the economy will return to growth in the third quarter after a 0.2% contraction in the previous three months, which would mean the UK avoids slumping into a technical recession.
Economists said the MPC would likely want to sit tight once more at this month’s meeting until there is further clarity over what will happen with Brexit on October 31.
Howard Archer, chief economic adviser to the EY Item Club, said: “We expect interest rates to be kept at 0.75% with the MPC firmly in ‘wait and see’ mode.
“Current heightened domestic UK political uncertainties reinforce the case for the Bank of England maintaining a watching brief.”
The rate-setters will have much to discuss, however, given the various options still on the table for Brexit.
They will also have to consider the underlying state of the UK economy, given that the monthly statistics from the Office for National Statistics only go up until July – before the latest political uncertainty and a series of closely-watched data showed the economy slowing.
The latest IHS Markit / CIPS UK services PMI rounded off a trio of dismal reports from the main economic sectors in August and when combined with those for the construction and manufacturing sector signalled a potential 0.1% shrinking in GDP in the third quarter of the year.
This all comes after the Bank itself warned in its August inflation report of a one-in-three chance of the economy shrinking at the start of next year as Brexit uncertainty takes its toll, even without a cliff-edge EU withdrawal.
Inflation, meanwhile, remains close to the Bank’s target – having edged up to 2.1% in July from 2% in June.
But the MPC has stressed that building inflationary pressures would still likely need to be reined in to keep inflation to target in the medium term.
Set against all this is the slowdown in the wider global economy as the US-China trade war continues unabated.
George Brown, at Investec Economics, said the Bank will have “plenty of domestic political developments to chew over”.
He added: “It now seems a question of not if but when a snap general election will be held, with both sides of the House of Commons indicating a desire to go back to the electorate.
“Though the MPC will steer well clear of commenting on such sensitive matters, it will need to grapple with the implications of a possible change of government and with it a shift in Brexit policy.”