Bank of England holds rate, hints at faster future hikes
BREXIT UNCERTAINTY DOMINATES OUTLOOK FOR THE WORLD’S FIFTH-LARGEST ECONOMY
The Bank of England (BoE) hinted at slightly faster future rises in interest rates if Brexit goes smoothly, but warned all bets were off if next March brought a “disruptive” departure from the European Union.
The BoE’s nine rate-setters voted unanimously to hold rates at 0.75 per cent yesterday, as expected by economists in a Reuters poll, after raising them in August for only the second time since before the financial crisis.
Bank of England governor Mark Carney said a disruptive no-deal Brexit was not the central bank’s main assumption, but if there was a shock to the economy, it was not possible to say if rates would need to rise or fall in response.
Brexit is dominating the outlook for the world’s fifth-largest economy, which has seen growth slow since the referendum decision in June 2016 to leave the EU.
Most economists do not expect rates to rise again until mid-2019.
“Since the nature of EU withdrawal is not known at present, and its impact on the balance of demand, supply and the exchange rate cannot be determined in advance, the monetary policy response will not be automatic and could be in either direction,” Carney told a news conference.
The BoE cut interest rates and ramped up its bond-buying programme after the shock referendum vote, but Carney cautioned against assuming it would do the same in the event of a no-deal Brexit.
One option, he said, would be to extend the horizon for returning inflation to the BoE’s target, a measure which would suggest slower interest rates hikes.
A disruptive Brexit would probably cause sterling to fall and push up inflation. Combined with a hit to supply chains and possible trade tariffs, that would argue for raising rates.
The BoE said policymakers would need to balance the hit to growth from lost trade, uncertainty and tighter financial conditions. That would normally make a case for lower rates.
Better consumer spending
Sterling rose modestly against the dollar after the BoE policy announcement to hit a day’s high. It later fell back to show almost no change from before the statement.
“November’s statement makes it pretty clear the Bank of England would like to be hiking rates further,” James Smith, an economist at bank ING, said.
“But given that it may be quite some time before we know for sure that a no-deal Brexit has been avoided, we suspect policymakers will struggle to hike rates before May 2019 at the earliest.”
The BoE said consumer spending performed better than it had expected but businesses were holding back on investment. Prime Minister Theresa May has yet to secure a transition deal to ease Britain’s exit from the EU. Assuming Brexit goes smoothly, the economy was likely to continue to grow by around 1.75 per cent a year, the BoE said.