The Bank of England has abandoned plans for further cuts to interest rates as it conceded the economy had stood up to the shock of June’s Brexit vote without the sharp slowdown Mark Carney and fellow policymakers had predicted.
The Bank left rates at 0.25% as expected by investors and revised up forecasts for economic growth in the final months of this year and throughout 2017, compared with its outlook published in August.
But they also warned that sterling’s sharp fall would push up inflation more than previously thought. That in turn would squeeze household incomes and coupled with uncertainty about the UK’s longer-term prospects outside the EU would stem economic growth in 2018. Taking the near and long-term forecasts together the economic picture in three years’ time is slightly worse than in August’s outlook.
The forecasts accompanied a unanimous decision by the Bank’s nine-strong monetary policy committee (MPC) to leave interest rates at 0.25%, the level to which they were cut in August to shore up confidence after June’s vote to leave the EU.
In comments likely to be interpreted by financial markets as ruling out any more QE or interest rate cuts any time soon, the Bank also said it could respond “in either direction” to changes in the economic outlook and used minutes from its latest policy meeting to highlight how the weaker pound pushes up inflation. The Bank also said “there are limits to the extent to which above-target inflation can be tolerated.”
Back in August the MPC had indicated they would support another interest rate cut to about 0.1% if the economy followed its predictions for a sharp slowdown. On Thursday it said that guidance had now “expired”.
That reflects a succession of business surveys and official data signalling that households and companies have largely shrugged off the Brexit vote for now, although worries about the UK’s longer-term prospects have pushed the pound to 30-year lows on foreign exchange markets.
Key points from the Bank’s quarterly forecasts and policy decision:
• Interest rates held at 0.25% and no change to scheme announced in August to pump an additional £60bn in electronic cash into the economy to buy government bonds and £10bn to buy corporate bonds.
• GDP growth in 2016 now expected to be 2.2%, up from 2.0% forecast in August
• GDP growth in 2017 now expected to be 1.4%, up from 0.8% forecast in August.
• But GDP growth in 2018 now expected to be 1.5%, down from 1.8% forecast in August.
• Inflation rises from 1.3% this year to 2.7% in 2017 and in 2018, higher than August forecasts.
• Inflation eases back to 2.5% in 2019 and expected to return close to Bank’s 2.0% target in 2020.
This latest decision on interest rates comes days after the Carney was forced to end weeks of speculation about his future as the Bank’s governor by announcing he had agreed to stay on until Brexit negotiations with the EU have ended in 2019.
The move followed criticism from pro-Brexit campaigners and MPs unhappy at what they saw as the overpoliticisation of his role in the run-up to the EU referendum, when Carney warned a leave vote could tip the UK into recession.
This article was written by Katie Allen, for theguardian.com on Thursday 3rd November 2016 12.16 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010