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Interest rates will not rise until 2019, but pound will continue decline

Hannah Uttley
People walk past the Bank of England in the City of London, Britain, August 23, 2017. REUTERS/Hannah McKay

Economists do not expect interest rates to rise until 2019, citing “reluctance” among policymakers to make changes amid ongoing Brexit negotiations.

According to the snapshot of economists’ views carried out by the BBC, half of those contacted think wages growth will outpace inflation in the first half of 2019. Inflation stood at 2.6% in July, well above the Bank’s official target of 2%.

MORE: Raise rates to stop inflation surging, says Bank of England policymaker 

The Bank of England base rate has remained the same since August 2016 when the Monetary Policy Committee took the momentous step to lower the rate for the first time in over seven years. Interest rates have since stayed at record-lows of 0.25%.

Despite reluctance among many MPC members to move the base rate, last week one committee representative, Michael Saunders, said a “modest rise” in rates was needed to control inflation.

And Saunders is not the first to suggest the move. In June, a clear divide appeared between MPC members, with three voting for a rate rise, while during the same month the Bank’s chief economist, Andy Haldane, said monetary policy should be tightened this year.

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Stuart Green, of Santander Global Corporate Banking, told the BBC that a rate rise was unlikely until 2019.

“We believe that policymakers will be reluctant to tighten monetary policy until greater clarity emerges around the UK’s post-EU trading framework, and our expectation of declining inflation through 2018 should also reduce the pressure for an interest rate rise,” he said.

MORE: Sterling stumbles again as political tensions heighten

However, Michael Lee at Cambridge Econometrics, expects a rise to come in either the second or third quarter of next year as he thinks inflation will stay above the Bank’s 2% target for the next two to three years.

Economists were also questioned about their predictions for the value of sterling over the coming months.

The value of sterling has see-sawed since the EU referendum in June last year (Yahoo Finance UK)

According to Morgan Stanley, Brits planning trips to Europe in the next few months should prepare themselves for a poor deal when exchanging their holiday money. Its currency strategy team expect sterling to weaken against the euro by a further 10% by March 2018.

When asked by the BBC about their expectations for inflation, answers varied with one saying it will reach 2.9% in October, while several others expecting it to hit 3% in the final three months of the year before starting to retreat.