Welcome to limbo land. That was the message from the Bank of England as it once again decided that Britain’s delay at the EU departure gate meant the wisest course of action was to leave interest rates well alone.
But only for now, because it was also clear from Threadneedle Street’s quarterly update on the economy that the wait-and-see approach will only last for as long as Brexit uncertainty persists.
Why? Because – on the assumption that the UK has a smooth exit from the European Union – the Bank thinks growth will pick up over the next three years, the unemployment rate will hit a record low of 3.5%, and excess demand will be pushing inflation above its official 2% target.
These forecasts are, however, based on what the financial markets think will happen to interest rates, and at present the expectation is that there will be only one quarter-point increase – from 0.75% to 1% - between now and 2022.
On past form, the Bank’s nine-strong monetary policy committee (MPC) would be highly unlikely to tolerate excess demand running at 1% of gross domestic product (GDP) and inflation of 2.2% (and rising) without responding more firmly. Were it not for Brexit, official borrowing costs would probably already be going up.
But the excess demand and the above-target inflation are a long way in the future. For now, the Bank’s view is that Brexit has made the economic data “unusually volatile”.
The Bank believes the economy swung from 0.2% growth in the final three months of 2018 to expand by 0.5% in the first quarter of 2019. But part of the recent bounce was due to firms stockpiling goods ahead of the original Brexit departure date, and Threadneedle Street believes growth will fall back to 0.2% in the second quarter of 2019.
One thing that the Bank is sure about is that the quality of growth has suffered in the past year. In early 2018, its quarterly inflation report envisaged a rebalancing of growth away from consumer spending and towards investment and trade.
The opposite has happened. Investment has fallen for four successive quarters, trade has been a drag on growth and the economy has become even more dependent on the willingness of households to carry on spending.
Investment is expected to bounce back once Brexit has been resolved, while low unemployment and rising real incomes will continue to support household spending. In those circumstances, the MPC is likely to become markedly more hawkish.
