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Bank of England leaves interest rates at 0.5%

Published 14/04/2016

Members of the MPC are expected to vote unanimously in favour of leaving interest rates at the current level of 0.5%
Members of the MPC are expected to vote unanimously in favour of leaving interest rates at the current level of 0.5%

The Bank of England warned a Brexit vote could hurt the economy and "push down on demand" as it kept the cost of borrowing on hold once more.

Members of the Bank's Monetary Policy Committee (MPC) said the economy may face "an extended period of uncertainty", as it considered the "likely implication for monetary policy" if Britain left the European Union.

The comments came as all nine policymakers on the MPC voted to leave rates at 0.5% - where they have remained since March 2009 - and keep its quantitative easing programme on hold at £375 billion.

Minutes of the meeting showed the MPC also stood by its stance that the next move for rates would be a rise rather than a cut, stating "it is more likely than not that the Bank rate will need to increase over the forecast period".

The MPC said there was evidence to suggest that uncertainty surrounding the EU referendum decision was already hampering activity.

It said: "There are some signs that uncertainty relating to the EU referendum has begun to weigh on certain areas of activity, as some decisions, including in capital expenditure and commercial property transactions, are being postponed pending the outcome of the vote."

"This might lead to some softening in growth during the first half of 2016," the minutes added.

The MPC said a vote for Britain to leave the EU might lead to uncertainty surrounding export growth, while also weighing on demand in the short term.

The comments come after the MPC warned last month that uncertainty over the EU vote could hit the UK economy.

But the MPC gave no clues as to how it might adjust monetary policy if Britain headed for the European exit door.

It comes after the International Monetary Fund (IMF) downgraded its forecast for UK economic growth earlier this week over fears of disruption if Britain leaves the EU on June 23.

The IMF scaled back its projection of UK economic growth for 2016 by 0.3 percentage points to 1.9% - marginally below the 2% forecast of the Government's Office for Budget Responsibility - but held its forecast for 2017 at 2.2%.

Experts are predicting interest rates to stay at 0.5% until 2017, although some believe a rate rise might come even sooner if Britain votes to stay in the EU.

The Bank has been in no hurry to raise rates, with inflation remaining historically low and way off the Government's 2% target.

Official figures revealed on Tuesday that Consumer Prices Index (CPI) inflation rose to its highest level for 15 months in March, stepping up to 0.5%.

But a series of industry surveys covering the manufacturing, construction and services sectors have pointed to a slowdown in gross domestic product (GDP).

Economists are now predicting growth will ease back to 0.4% in the first quarter of this year, despite the ONS recently revising up its figures for UK economic growth to 0.6% in the fourth quarter and 2.3% for 2015 as a whole.

Chief UK economist at Pantheon Macroeconomics, Samuel Tombs, said the Bank was still holding fire on its decision to raise rates until after the EU referendum.

He said: "The committee still is in 'wait and see' mode; it will take stock after the EU referendum has been concluded in June, likely with a vote to remain.

"We continue to think that inflation will surprise to the upside later this year and throughout 2017, compelling the MPC to raise interest rates at least once before the end of this year."

Howard Archer, chief European and UK economist at IHS Economics, said if Britain voted to leave the EU, then monetary policy would become more complicated for the central bank.

He added: "Sterling would be likely to fall sharply, with inflationary implications. However, it is also likely that heightened uncertainty would weigh down markedly on economic activity, especially on business investment, and likely also on consumer spending.

"The weaker pound though would be supportive to exports."

Chris Williamson, chief economist at Markit, said the update from the MPC had brought "fresh signs" of how uncertainty surrounding the EU referendum is "unsettling business confidence and leading to the postponement of decision making".

He added: "It's highly likely, therefore, that the second quarter could see growth slow further, possibly considerably, if anxiety about the referendum intensifies, turning the focus to the possible need for more stimulus."

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