The Bank of England warned of mounting weakness in the British economy as it kept interest rates on hold despite two members of its rate-setting panel once again voting for an immediate cut.
Sounding the alarm that economic growth would come close to flatlining in the final three months of the year, the Bank’s monetary policy committee (MPC) voted 7-2 to keep the official interest rate on hold at 0.75%.
Two of the outside experts on the nine-member panel, Jonathan Haskel and Michael Saunders, said the weakness of the economy warranted an immediate reduction to 0.5%, while seven others, including the Bank’s governor, Mark Carney, voted to leave borrowing costs unchanged at among the lowest levels on record. Haskel and Saunders had voted for a rate cut at the last MPC meeting in November.
Threadneedle Street said it expected gross domestic product (GDP) to grow by only 0.1% in the fourth quarter, slightly weaker than it had previously anticipated, as household spending stalled and business investment was kept on hold in the run-up to the election and amid a lack of clarity over Brexit.
It said some company spending plans put on hold since the EU referendum could be reinstated by the end of next year but warned that heightened uncertainty over the future trade deal with the EU could continue to weigh on the economy.
In a signal that the impact of Brexit uncertainty is unlikely to diminish, despite Boris Johnson’s key election message that getting Brexit done would unleash a wave of investment, the Bank said the response of companies and households to leaving the EU would depend on developments in the year ahead as ministers seek to strike a trade deal with Brussels.
Announcing the interest rate decision, the MPC warned there was “no evidence yet about the extent to which policy uncertainties among companies and households have declined”.
According to the Bank’s network of agents across the country, company investment intentions remained depressed by slower global growth and political uncertainty. Firms in the manufacturing and construction sectors told the Bank’s agents they thought they would benefit from an increase in investment when uncertainty started to lift. However, the agents said: “There were risks around how soon that would materialise.”
The MPC said it expected inflation to remain below its 2% target next year. However, over the longer term it still anticipated that interest rates would need to rise at a gradual pace and to a limited extent.
However, it warned there could be risks to the downside for the economy. In a heavy hint that it would be prepared to cut interest rates, the MPC said: “Monetary policy might need to reinforce the expected recovery in UK GDP growth and inflation.”
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