The Bank of England (BoE) has held off from cutting interest rates as there are signs of a recent pick in the economy.
However, the BoE has delivered a huge blow on the eve of Brexit as the bank has cut its growth forecast for the next three years.
The nine members of the Monetary Policy Committee (MPC) voted seven to two hold interest rates at 0.75%.
The bank’s quarterly forecast revealed they are expecting the economy to have flatlined at the end of 2019.
The bank has made a significant downgrade to their growth forecasts to 0.8% in 2020, 1.4% during 2021 and 1.7% for 2022. Previously the bank predicted a growth of 1.2%, 10.8% and 2% respectively.
In minutes of the MPC meeting, the Bank 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.”
It added, “Policy might need to reinforce the expected recovery in UK GDP [gross domestic product] growth should the more positive signals from recent indicators of global and domestic activity not be sustained or should indicators of domestic prices remain relatively weak.”
Ranko Berich, Head of Market Analysis at Monex Europe said, “We’ve learned a lot about the MPC’s reaction function today, which remains essentially data-driven. The “risk management” argument that has led other central banks into insurance rate cuts turns out to have not been very persuasive for the majority of the MPC.
“The key factors driving the majority of the MPC voting to hold rates seems to have been the obvious ones: Brexit risk has fallen and the US and China have signed a trade truce. The doves were unpersuaded by the pickup in Q1 survey data, while the hawks kept faith that the UK economy will indeed see a bounce in 2020.
“Given that markets were basically pricing a rate cut at 50-50 odds the MPC’s decision today was always going to come as a surprise to markets, and therefore cause some sterling volatility. We have indeed seen a small rally in sterling.
“The question now is if Q1 data will justify the faith that the majority of the MPC has shown, and live up to expectations for a post-Brexit improvement from a dismal 4th quarter.”
Silvia Dall’Angelo, Senior Economist, Hermes Investment Management said, “The BoE kept rates unchanged at 0.75% at today’s meeting. While the move is in line with the expectations of most economists, it is somewhat surprising for rates markets, which were pricing in an almost 50% likelihood of a rate cut going into the meeting, following a flurry of negative economic data for Q4 and dovish comments from BoE officials.
“However, it is reassuring that the BoE has maintained a forward- rather than backward-looking approach when making its decision. The main change at this meeting concerned the forward guidance for monetary policy: the Bank dropped its guidance for limited and gradual tightening and adopted a more explicit dovish bias.
“A rate cut is still pretty much on the table and will be deployed in coming meetings if the pick-up in economic activity suggested by recent surveys does not materialise. But for now, the Bank is still in wait-and-see mode, monitoring how the economy responds to the recent reduction of policy uncertainty, both related to Brexit and international trade, and the prospects of fiscal stimulus.
“Crucially, it is saving its limited ammunition for when it might be more needed, also depending on how negotiations with the EU develop going forward. Today’s meeting has displayed the communication challenges central banks face in an environment of pronounced uncertainty.
“While Mark Carney is about to leave office with his unreliable boyfriend reputation intact, Andrew Bailey has just got a flavour of the difficult task he is about to embark on.”
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