Stockholm (Ekonamik) – The Bank of England’s monetary policy committee (MPC) voted unanimously to keep interest rates at 0.75%, scaling back the number of increases in borrowing costs required to meet the UK government’s 2% inflation target to a single 0.25 percentage point over the next two years, it emerged following the MPC’s meeting Thursday.
In so doing the BoE followed both the European Central Bank and the U.S. Federal Reserve in keeping interest rates steady due to fears about a slowdown in the global economy and, in Britain’s case, Brexit.
The announcement added to market anxiety over the health of the global economy, with most European stock markets in the red by late afternoon over concerns that central banks may not be able to stop the downturn.
The BoE also cut its growth forecast for 2019 from 1.7% to 1.2%, warning that the economy is on track for the weakest year since the financial crisis, citing evidence of Brexit fears spreading from companies to consumers. Its forecast assumes the UK’s departure from the EU at the end of March will go smoothly, which is becoming less likely by the week.
BoE Governor Mark Carney warned that leaving the EU without a deal would raise the chances of “negative quarters” of growth, or a recession.
Chart 2.3 The recovery in business investment has stalled since the EU referendum
Business investment after previous recessions
Source: BoE February 2019 Inflation Report, p.10
“The fog of Brexit is causing short-term volatility in the economic data and, more fundamentally, it’s creating a series of tensions,” Carney said, adding that the economy as a whole is not prepared for a no-deal exit from the European Union.
“Businesses had appeared increasingly to be responding to Brexit-related uncertainties and there were some signs that those uncertainties might also be affecting households’ spending and saving decisions,” minutes from the MPC meeting said. “The economic outlook will continue to depend significantly on the nature of EU withdrawal, in particular: the new trading arrangements between the EU and the UK; whether the transition to them is abrupt or smooth; and how households, businesses and financial markets respond.”
The Bank’s February 2019 Inflation report also suggested that future interest rates would be “gradual and limited”, and that inflation would be kept low no matter what form Brexit takes. It also warned that there was no guarantee that interest rates would be cut in the event of a no-deal Brexit.
“The monetary response to Brexit, whatever form it takes, will not be automatic and could be in either direction,” it said.
Image: Wikimedia Commons