The Bank of England is set to keep interest rates on hold at 0.75% on Thursday, but downgrade Britain’s economic outlook as prolonged Brexit uncertainty takes its toll.
The noon rates decision will be accompanied by the bank’s latest set of forecasts in its now renamed Monetary Policy Report, which are expected to slash its 2020 growth outlook from the 1.3% previously pencilled in.
Economists believe it may also cut the ambitious 2.3% growth forecast for 2021, given signs of strain in the UK economy amid political wrangling and Brexit uncertainty, with the withdrawal deadline pushed back again to January 31.
We are dubious that the Bank of England will cut interest rates unless the UK economy takes a major downward lurch Howard Archer, EY Item Club
The bank’s Monetary Policy Committee (MPC) warned in its last rates decision over the damage being inflicted by “entrenched” Brexit uncertainty.
It also hinted at the possibility that rates may need to be cut if Brexit is delayed again, and since then two MPC members have voiced support for the case for a rate reduction in such circumstances.
But the looming snap General Election on December 12, together with Prime Minister Boris Johnson’s move to secure a Withdrawal Agreement with the EU, is seen staying the bank’s hand.
This comes despite its counterparts in Europe and America recently moving to reduce rates in the face of slowing global growth.
Howard Archer, chief economic adviser to the EY Item Club, said it would be “extremely unusual” for the bank to change monetary policy in the run-up to a general election.
He is pencilling in a unanimous vote among the nine-strong MPC, though he added there could potentially be some dissent from one or more members.
Before the latest Brexit extension, policymakers Gertjan Vlieghe and Michael Saunders both said rate cuts would likely be needed to support the economy if Brexit was delayed again.
Mr Archer said there is a “very real chance” rates will be cut in 2020 even if a deal is now struck by January 31, although he believes it is more likely they will be held at 0.75% through to 2021.
He said: “We are dubious that the Bank of England will cut interest rates unless the UK economy takes a major downward lurch given a still relatively tight labour market, the fact that fiscal policy is likely to be looser and a belief that the economy will gradually pick-up following a UK exit from the EU with a deal.”
Steady and below-target inflation – which remained at near three-year lows of 1.7% in September – also helps ease any pressure on the bank to raise rates.
This all comes as economic indicators suggest all parts of the economy are suffering amid the Brexit indecision, with the latest purchasing managers’ index reports signalling the longest contraction in Britain’s private sector since the financial crisis.
But a buoyant July performance is set to help the UK avoid a technical recession, with third-quarter growth seen bouncing back to around 0.4% from the 0.2% contraction in the previous three months and some economists pencilling in expansion of 0.2% in the final quarter.