Bank holds interest rates as ‘intensified’ Brexit uncertainty hits growth

The Bank of England has kept interest rates on hold at 0.75% as it cautioned “intensified” Brexit uncertainties were slamming the brakes on UK growth.

Policymakers on the Bank’s nine-strong Monetary Policy Committee (MPC) voted unanimously to keep rates unchanged in its last decision of 2018.

The Bank said no-deal Brexit fears had “intensified considerably” since its last meeting and these were hitting financial markets, bank funding costs and the pound, as well as the wider economy.

The Bank warned that internal estimates suggested UK growth was set to slow by more than previously expected to 0.2% in the final three months of the year, down sharply on 0.6% seen in the heatwave-boosted third quarter.

It added growth was likely to remain around that level in the first three months of 2019.

This was worse than first feared by the Bank, which said in November that growth was likely to slow to 0.3% in the fourth quarter and recover to around 0.4% thereafter.

Bank of England
Bank governor Mark Carney has stressed rates could go up or down in a no-deal Brexit (Daniel Leal-Olivas/PA)

In minutes of the rates meeting, the Bank said: “The further intensification of Brexit uncertainties, coupled with the slowing global economy has also weighed on the outlook for UK growth.

“Business investment has fallen for each of the past three quarters and is likely to remain weak in the near term.”

The housing market has remained subdued and retail spending was showing signs of slowing, the Bank said.

But the Bank said it had looked to separate the “shorter-term developments” from the dynamics of the economy.

It reiterated that, assuming the economy grew in line with forecasts and assuming an orderly Brexit, rates would likely need to rise by a “gradual pace and to a limited extent” to bring inflation – currently running at 2.3% – back to target.

It also stands ready to respond to the fallout from Brexit, warning once more than rates could go “in either direction” even in a cliff-edge withdrawal.

Just weeks ago, the Bank warned in its Brexit scenario analysis that Britain could be tipped into a recession worse than the financial crisis in the event of a no-deal disorderly Brexit.

Governor Mark Carney has insisted that rates could go up or down after a cliff-edge Brexit, with the Bank’s analysis warning they might be hiked to 5.5% if a further fall in the pound sends inflation soaring.

In the controversial documents requested by the Treasury Select Committee, the Bank predicted that the worst-case scenario could see GDP fall by 8%, the pound plunge by 25%, and house prices tumble 30%.

The minutes of the latest MPC meeting also flagged up slowing global growth, particularly in the euro area where it said the slowdown had been marked.

But it said Chancellor Philip Hammond’s recent Budget announcements would offer a boost to GDP, forecasting these would add around 0.3% over the next three years.

The Bank also offered some cheer to households as it said current internal estimates saw inflation, which eased back to 2.3% in November, dropping further to around 1.75% in January thanks to lower fuel prices and Budget measures.

Inflation would also remain below the 2% target for the following three months before picking up later in 2019.