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Bank keeps rates on hold but cut still on cards as growth weakens

Members of the Monetary Policy Committee voted 7-2 to keep rates unchanged at 0.75%.

The Bank of England has held rates at 0.75%.
The Bank of England has held rates at 0.75%.

By Holly Williams, PA Deputy City Editor

The Bank of England has held interest rates at 0.75% but kept the door firmly open to a cut if Brexit uncertainties and global growth fears do not let up.

Minutes of the Bank’s latest decision revealed that the Monetary Policy Committee (MPC) voted 7-2 to keep rates unchanged – with Jonathan Haskel and Michael Saunders repeating their calls for a cut to 0.5%.

The Bank slashed its forecast for growth in the fourth quarter to just 0.1%, having previously expected growth of 0.2%, as Brexit uncertainty continues to hamper activity.

It said that, following Prime Minister Boris Johnson’s decisive election victory and expectations that a Brexit deal may now be ratified before the January 31 deadline, “it was possible that household and business sentiment could pick up in the near term”.

Global growth was also showing “tentative” signs of stabilising.

But the Bank added: “If global growth failed to stabilise or if Brexit uncertainties remained entrenched, monetary policy might need to reinforce the expected recovery in UK GDP growth and inflation.”

The rates verdict came as the Bank remains at the forefront of a scandal over the hacking of its audio feed of press conferences after it emerged that hedge funds could have profited by listening in seconds ahead of rivals.

The Bank admitted a back-up communications system it installed a few years ago had been tapped and shared with a market news service, which had allegedly sold access to allow hedge funds to gain advantage over competitors by accessing comments ahead of the broadcast feed.

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Mark Carney is the Bank’s outgoing Governor (Chris J Ratcliffe/PA)

The Bank said the two MPC members who voted for a cut felt that “with limited space to cut Bank Rate, risk management considerations favoured a prompt response to downside risks at present in order to ensure a sustained return of inflation to the target”.

They felt that a rate reduction was needed, given that growth was weaker than expected, while inflation – at 1.5% in November – was subdued and employment growth was slowing.

But the majority of the committee said they believed growth would rise above potential next spring, assuming a Brexit deal is passed.

The Bank said that if growth recovers as predicted, rates may need to be hiked “at a gradual pace and to a limited extent”.

It stressed that it was too early to judge the impact on the economy of the election result in the UK and recent signs of an easing to the US-China trade war.

The dissenters among the policymakers also voted for a cut last month in the first split decision on the MPC for more than a year.

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(PA Graphics)

The decision came as official figures revealed that the economy stagnated in October as Brexit and political uncertainty has hampered activity, with more recent surveys confirming a worsening picture for growth.

Since then, the Conservatives’ triumph in the December 12 election has helped remove some of the clouds of political uncertainty and concerns over another Brexit deadline extension.

However, fears over a no-deal Brexit remain to the fore with Mr Johnson legislating to prevent MPs from extending the Brexit transition period beyond the end of 2020.

Howard Archer, chief economic adviser to the EY Item Club, said: “For now, we just about maintain the view that the Bank of England is most likely to keep interest rates at 0.75% through 2020.

“However, it is a close call and there is clearly a very real possibility that there could be a 25 basis point interest rate cut to 0.5% in 2020.”

Meanwhile, as the MPC meets to decide on its verdict, speculation is swirling over an imminent appointment to replace outgoing Bank Governor Mark Carney.

Dame Minouche Shafik – a former deputy governor at the Bank and current director at the London School of Economics – has reportedly emerged as a leading favourite for the post, which could being announced within days, ahead of Mr Carney’s departure on January 31.

PA

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