Yahoo Finance Bank of England warns Brexit limbo damaging as interest rates unchanged
The Bank of England has held interests rates unchanged at 0.75%, as it warned that “entrenched uncertainty” around Brexit could drag on the UK economy.
The bank’s Monetary Policy Committee (MPC) voted unanimously to keep rates on hold and to maintain stockpile of government bonds.
Economists had forecast no changes, arguing that the continued uncertainty of Brexit left governor Mark Carney with little room to manoeuvre.
The MPC said on Thursday that “Brexit-related developments are making UK economic data more volatile.” UK growth appears to be slowing but remains slightly positive, suggesting the bank thinks the UK will avoid a recession. The Bank downgraded its forecast for GDP growth in the third quarter from 0.3% to 0.2%.
However, the MPC warned that “political events could lead to a further period of entrenched uncertainty” that could drag on UK economy. It represents the Bank’s first warning that being stuck in continued Brexit limbo — rather than a deal, no deal, or no Brexit — could be damaging. The MPC didn’t quantify how big the effects might be or what it would do in this scenario.
The warning comes in the wake of a law passed by parliament at the start of the month forcing prime minister Boris Johnson to seek a Brexit extension if he doesn’t reach a deal by 19 October. EU leaders have warned in recent days that a deal looks unlikely.
The Bank of England’s decision to do nothing comes despite central banks around the world cutting rates in recent weeks in response to gathering storm clouds for the global economy. Global growth is being hit by the continued US-China trade war and the US yield curve has inverted several times, suggesting a US recession could be imminent.
The US Federal Reserve on Thursday announced a 25 basis point interest rate cut to a range of 1.75% to 2%, citing continued global growth concerns and weakening US fundamentals.
Last week the ECB also cut rates for the first time since 2016 as part of a wide-ranging stimulus package designed to boost the faltering eurozone economy.
In the summary of its decision, the MPC said that “the outlook for global growth has weakened” since its last meeting and blamed the intensifying trade war.
The MPC repeated its warning that a no-deal Brexit would hit the pound and cause the UK economy to slow. It stressed that the Bank’s response “would not be automatic and could be in either direction,” wording that it has repeatedly used to the incredulity of many economists.
The Bank of England signalled its next move could be to raise rates rather than cut them. The MPC said that if the UK has a smooth Brexit and global growth recovers, the Bank could raise rates “at a gradual pace and to a limited extent,” reusing terminology it used its previous bulletins.
