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Bank of England leaves rates unchanged but has a sober message for the PM

The Bank of England has surprised many investors by leaving interest rates unchanged at 0.75% in its latest monetary policy decision.

The Bank’s nine-person Monetary Policy Committee voted 7-2 to leave monetary policy unchanged, despite expectations amongst some investors that it would slash borrowing costs in the face of a slowdown in the UK economy.

However it also delivered a sober message to the prime minister on the eve of Brexit day, pointing out that, thanks in part to the decision to leave the European Union, Britain’s long-term growth potential had dropped from over 2% ahead of the referendum to around just over 1% in the coming years.

Image: This is the last interest rate decision under Mark Carney’s tenure as governor

The downgrade in the Bank’s so-called “potential supply growth” – the rate at which the economy can expand without generating inflation – is a double blow for Downing Street, since it also flies in the face of the chancellor’s stated ambition to lift UK economic growth back to its post-war average of 2.7-2.8%.

The assessments formed part of the Bank’s Monetary Policy Report – the last set of forecasts and the last interest rate decision under Mark Carney’s tenure as governor.

Advertisement Why BoE message should send shivers through Whitehall

Bank slashes assessment of how much growth UK can generate

The forecasts pointed out that while the official growth numbers were expected to remain weak in the final quarter of last year, businesses seem to have become more confident and more willing to invest since the election result.

That uptick in some of the business surveys helped persuade the committee that there was no need to cut interest rates this month.

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But Mr Carney warned: “To be clear, these are still early days, and it is less of a case of so far so good, than so far, good enough.”

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The Bank also cut its growth forecasts for each of the next three years, predicting that the economy would grow by only 0.8% this year, 1.4% in 2021 and 1.7% in 2022. But its projections also suggest there is a 37% chance of Britain being recession at present.

However the Bank’s forecasts do not take into account the likely increase in government spending the Treasury is planning in its March Budget.

‘So far, good enough’ – Carney

The minutes to the meeting said: “Since the December meeting, international developments had been positive and the most recent UK data supported the forecast of a near-term recovery in growth… Reduced Brexit uncertainties, and the easier stance of fiscal policy, might also be pushing up on UK equilibrium interest rates, making the existing policy setting more accommodative, all else equal.”

The two MPC members who voted for lower interest rates were Jonathan Haskel and Michael Saunders, who have been supporting a cut since November.

The pound rose by a cent against the dollar on the Bank’s announcement to $1.31

SOURCE : https://news.sky.com/story/bank-of-england-leaves-rates-unchanged-11921474

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