Rate hike misery remains on cards despite slowdown

● Central bank governor warns Brexit uncertainty weighing on the economy

Economic growth will remain “sluggish”, the Bank of England yesterday warned after keeping interest rates on hold, though experts said a hike remained on the cards later this year.

Policymakers on the central bank’s monetary policy committee voted 6-2 to keep rates at 0.25 per cent, with fewer members this month arguing for a rise amid conflicting signals on the health of the economy.

The decision came as bank governor Mark Carney warned that uncertainty surrounding Brexit was now weighing on the economy – knocking consumer confidence and reining in business investment.

He warned that the assumption of a smooth transition under Brexit would be “tested” over the next two years.

“If UK households and businesses look through the flurry of headlines, then the econoas my can be expected to pick up from its current period of sluggishness.”

But Carney suggested that a pick up in growth would likely pave the way for a rate rise.

In its quarterly inflation report, the bank cut its forecasts for growth to 1.7 per cent in 2017 and 1.6 per cent in 2018 and cautioned the squeeze on household incomes would continue, with inflation still expected to peak at around 3 per cent in the autumn.

Nick Dixon, investment director at pensions and savings giant Aegon, said: “It was widely expected that the Bank of England would keep interest rates at their current level for the time being given uncertainty surrounding the UK economy.

“While the latest inflation figures showed a small dip to 2.6 per cent from May’s high of 2.9 per cent, longer term upwards trends remain a concern for the monetary policy committee and further price pressure will prompt a rate rise.”

The British Chambers of Commerce described the decision to leave rates unchanged “unsurprising”, noting that it reflected the more subdued levels of growth seen in the business community over recent months.

Adam Marshall, the organisation’s director general, said: “In our view, the Bank of England’s forecasts are still slightly optimistic about the nearterm outlook for the UK economy.

“We expect inflation to rise by more than the central bank is currently predicting, peaking at 3.4 per cent this year.”

MPC members also voted to withdrawpartoftheeconomyboosting package unleashed a year ago in the aftermath of Brexit. It will call time on the Term Funding Scheme to offer cheap-finance to banks from next February.

Laith Khalaf, senior analyst at financial services firm Hargreaves Lansdown, said: “The Brexit process is really only just beginning, and it will have many long-lasting implications. Consequently the task of determining just what effect Brexit had on the UK economy will mostly fall on the shoulders of tomorrow’s historians, rather than today’s economists.”