Growing worries over prospects for the world economy and the mounting fallout from Brexit uncertainty have pushed the Bank of England to keep interest rates on hold before Christmas.
Sounding the alarm that Brexit worries had intensified considerably in recent weeks to unleash heightened volatility in the financial markets, Threadneedle Street said it would wait for greater clarity next year before considering raising interest rates again.
The Bank’s rate-setting monetary policy committee (MPC) voted unanimously to leave the cost of borrowing unchanged at 0.75% as it warned that consumer demand and business investment was likely to have suffered amid the political impasse over Theresa May’s plan to leave the EU.
In its assessment of the economy, the nine-member panel, which includes the Bank’s governor, Mark Carney, said: “Heightened Brexit uncertainties were evident across a range of domestic financial markets,” including a depreciation in sterling.
“The further intensification of Brexit uncertainties, coupled with the slowing global economy, has also weighed on the near-term outlook for UK growth.”
Growth had slowed in the global economy, particularly in the euro area, amid growing trade tensions around the world, the Bank added.
It said that consumers were increasingly refraining from big ticket purchases and that businesses had delayed their investment plans amid Brexit uncertainty. The outlook for corporate spending is likely to remain weak should parliament remain unable to break the deadlock.
Against that backdrop the MPC said that UK growth would probably slow to 0.2% in the final quarter of the year, below its previous expectations,. It added that the slower rate of growth would probably persist into the first quarter of 2019.
Despite the gathering problems for the British economy, the central bank said it still believed higher interest rates would be required over the coming years to keep a lid on inflation, although only in the event of a smooth Brexit.
Global oil prices have dropped in recent months to dampen the rate of inflation, with the consumer price index falling to 2.3% in November, while the Bank said it expects the rate to drop below 2% in January and remain below that level for some time. The Bank has a target inflation of 2% set by the government, meaning the natural decline in inflation could remove some of the pressure to raise rates.
Annual growth in workers’ pay has, however, begun to accelerate at the fastest rate in a decade, amid the lowest levels of unemployment since the mid-1970s, which the MPC said could add to inflationary pressures in future.
Dependent on a smooth Brexit, the MPC said: “In that context, an ongoing tightening of monetary policy over the forecast period, at a gradual pace and to a limited extent, would be appropriate.”
The central bank did, however, warn that it stood ready to cut rates or raise the cost of borrowing to protect the economy in the event of a disorderly and damaging departure from the EU.
The Bank previously said that crashing out of the EU without a deal next year could trigger an immediate recession worse than the 2008 financial crisis.
