BoE split on rates, warns Brexit deal to hit growth

The Pak Banker - - FRONT PAGE -

The Bank of Eng­land has warned that the gov­ern­ment's Brexit deal will drag down growth over the next three years as ex­tra trade bar­ri­ers raise costs. It came as two Bank pol­i­cy­mak­ers called for an im­me­di­ate in­ter­est rate cut to sup­port the econ­omy. The Bank voted 7-2 to keep in­ter­est rates on hold at 0.75%.

Pol­i­cy­mak­ers said weaker global growth and on­go­ing un­cer­tainty over Brexit would con­tinue to weigh on the UK econ­omy. The Bank said the new EU with­drawal agree­ment struck by Prime Min­is­ter Boris John­son had re­duced the like­li­hood of a no-deal Brexit.

The Mone­tary Pol­icy Com­mit­tee (MPC) that sets in­ter­est rates said this would end some of the un­cer­tainty fac­ing busi­nesses and house­holds.

How­ever, pol­i­cy­mak­ers added that the tran­si­tion to a new trade deal would in­tro­duce new cus­toms checks and reg­u­la­tory bar­ri­ers.

The MPC said its as­sump­tion of a Canadastyl­e "deep free-trade agree­ment" be­tween the UK and EU would "raise ad­min­is­tra­tive costs for firms" do­ing busi­ness with the con­ti­nent.

The Bank's Mone­tary Pol­icy Re­port said weaker global growth and its new as­sump­tions about Brexit would knock 1% off UK growth over the next three years com­pared to its fore­cast in Au­gust. Pol­i­cy­mak­ers ex­pect the UK econ­omy to grow by 0.4% in the three months to Septem­ber, dou­ble its es­ti­mate in Au­gust amid a re­cov­ery in the UK's dom­i­nant ser­vices sec­tor.

How­ever, growth in the fi­nal quar­ter of the year is ex­pected to fall back to 0.2%.

Spend­ing pledges by the gov­ern­ment are also ex­pected to boost growth in the com­ing years. Pol­i­cy­mak­ers said Brexit would con­tinue to dom­i­nate the eco­nomic out­look and could per­ma­nently re­duce long- term growth. The Bank also cited re­search that showed the level of busi­ness in­vest­ment was around 11% lower be­cause of Brexit un­cer­tainty. For the first time, Bank pol­i­cy­mak­ers changed their as­sump­tion about the UK's fu­ture trad­ing re­la­tion­ship with the EU.

It now as­sumes the gov­ern­ment will strike a free-trade agree­ment with Brus­sels that will keep goods tar­iffs at zero but in­tro­duce cus­toms checks at the bor­der. Pol­i­cy­mak­ers said: "As a re­sult, trade flows are likely to fall and some com­pa­nies might exit the mar­ket". Di­verg­ing reg­u­la­tions would also hit a wide va­ri­ety of sec­tors across the EU, from law to bank­ing.

The Bank also sug­gested that trade deals with new part­ners would be years away, re­flect­ing the fact that "it typ­i­cally takes sev­eral years for new trade deals to be ne­go­ti­ated and im­ple­mented".

Michael Saun­ders and Jonathan Haskell, two of the Bank's ex­ter­nal rate-setters, voted to cut in­ter­est rates to 0.5%, from the cur­rent rate of 0.75%.

They said in­fla­tion, which cur­rently stands at 1.7%, sug­gested that there was lit­tle risk that the econ­omy would over­heat in the medium term if in­ter­est rates were cut.

The MPC ex­pects in­fla­tion, as mea­sured by the con­sumer prices in­dex (CPI), to fall to around 1.2% by next spring as the im­pact of the gov­ern­ment's en­ergy price cap kicks in.

This is well be­low the Bank's 2% tar­get. While the un­em­ploy­ment rate re­mains be­low 4%, which is its low­est since the 1970s, Mr Saun­ders and Mr Haskell said they be­lieved re­cent data sug­gested the "labour mar­ket was turn­ing". They also said there was a risk world growth could be weaker and Brexit un­cer­tain­ties could per­sist for longer than the MPC's as­sump­tions.

Fi­nan­cial mar­kets be­lieve in­ter­est rates will be cut to 0.5% in the com­ing year.

Lower in­ter­est rates are good news for bor­row­ers and bad news for savers as com­mer­cial banks use the Bank of Eng­land as a ref­er­ence point for the rates they of­fer on mort­gages and sav­ings ac­counts.

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