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Bank of England slashes growth forecast for UK economy, holds interest rates

Alanna Petroff
Senior Economics Correspondent at Yahoo Finance UK
Mark Carney leads the Bank of England. Photo: Fabrice Coffrini/Getty Images

The Bank of England is losing faith in Britain’s economic strength and slashed its outlook for the country on Thursday as it opted to leave interest rates on hold.

The BoE now expects Britain’s economy to grow by just 1.2% this year and 1.5% in 2020. Back in November, the central bank forecast the economy would grow by 1.7% each year.

This 2019 downgrade puts Britain on course for its weakest economic growth in the 10 years since the global financial crisis.

Brexit concerns have put a further drag on the UK economy since the November forecast, leading businesses to delay investment and purchases. Global trade tensions have also dampened worldwide business sentiment.

UK economic growth slowed in late 2018 and appears to have weakened further in early 2019. This slowdown mainly reflects softer activity abroad and the greater effects from Brexit uncertainties at home,” the BoE said in a written statement.

The updated economic forecast comes just hours after the European Commission predicted the UK economy would grow by 1.3% annually in both 2019 and 2020, down from about 1.4% last year.

The pound (GBPUSD=X, GBPEUR=X) dropped slightly versus the US dollar and euro in reaction to the latest BoE update.

Interest rates held at 0.75%

Britain’s central bank opted to leave its benchmark interest rate unchanged as it waits for a resolution to the high-profile Brexit negotiations.

The UK central bank left its key interest rate at 0.75%. This rate influences the interest rates banks charge for consumer loans and mortgages. When times are good, the BoE raises rates to stymie the amount of money sloshing through the economy. When times are bad, it lowers rates to encourage banks to lend more money and prompt consumers to go out and spend.

The BoE’s ultimate goal is to keep inflation at 2%. Currently, UK inflation is hovering at 2.1%, down from a recent peak of 3.1% in late 2018.

The bank said it plans to raise interest rates in the coming years “at a gradual pace and to a limited extent” if the economy develops in line with its expectations.

Brexit warning

The central bank warned last year that the country could be headed for an economic shock more severe than the global financial crisis if prime minister Theresa May’s government is unable to finalise a Brexit deal by the 29 March deadline.

In this worst-case Brexit scenario, the central bank predicted the UK economy could shrink by about 8% within a year. That fall would be the worst the country has seen in nearly 100 years.

The BoE has said it might raise rates due to the inflationary impact of a likely slump on the value of the pound, although most economists think it would cut rates to cushion the blow to the economy.

The BoE is scheduled to make its final pre-Brexit decision on interest rates on 21 March.

READ MORE: The surprising industry with the biggest job gains since the Brexit referendum