Case for rate rise weak as UK wobbles amid Brexit worries

THE Bank of England is expected to keep interest rates on hold this week, after inflation dipped in June and economic growth continues to stutter.

Economists believe the Bank’s Monetary Policy Committee (MPC) will keep rates at 0.25% on Thursday, despite three out of eight policymakers calling for a hike last month and amid conflicting public pronouncements in recent weeks.

Prior to June’s inflation reading of 2.6% there had been clamour for a rate rise, as a Brexit-fuelled increase in the cost of living ramped up pressure on hard-pressed households.

While remaining above the Bank’s 2% inflation target, it represented an easing from May’s 2.9%.

Howard Archer, chief economic adviser to the EY ITEM Club, the independent UK economic forecasting group, said: “The odds now very strongly favour the Bank of England keeping interest rates at 0.25% next Thursday after the August MPC meeting.

“The case for any near-term interest rate hike has been watered down by inflation dipping in June, while UK growth remains stuck in a low gear.”

Recent GDP figures showed growth was limited to 0.3% in the second quarter, in what the Office for National Statistics described as a “notable slowdown” for the economy.

There have also been signs of growing division among rate setters, with Ian McCafferty, Kristin Forbes and Michael Saunders voting for a rise in June and chief economist Andy Haldane suggesting he may support a “prudent” increase this year.

Another MPC member, Gertjan Vlieghe, has insisted that it would be wrong to raise borrowing costs at a time of slowing consumer spending.

Governor Mark Carney has sent conflicting messages, saying both “now is not yet the time” to raise rates and then that a rate hike may “become necessary”.

But it is unclear how many policymakers will vote for a rise, with Ms Forbes having stepped down at the end of last month and her replacement, Silvana Tenreyro, an unknown quantity.

Economists also expect the Bank to downgrade growth forecasts when it releases its quarterly inflation report, following a slump in consumer confidence and a string of weak economic data, further diminishing the chances of a hike.

Fabrice Montagne, chief UK and senior European economist at Barclays, said: “We expect the Bank of England to downgrade its forecast in order to reflect disappointing data. However, any revision is expected to be minimal, just as in quarter one when the Bank chose not to reflect the full downside surprise in its forecasts.

“It nonetheless makes the assumption of some rebound in investment next year as Brexit negotiations enter a more consensus agenda.

“Given the difficult start of the talks, this could easily be challenged, leading to lower confidence and activity forecasts.”