Bank set to keep rates at 0.75% as Brexit uncertainty reigns

The Bank of England is expected to keep rates unchanged at 0.75% on Thursday and remain firmly in wait-and-see mode until Brexit uncertainty clears.

The last rates decision of 2018 comes as prospects of a Brexit deal are left hanging in the balance, with the economy showing signs of stagnating as businesses, consumers and home-buyers put big spending decisions on hold.

Economists believe members of the Bank’s nine-strong Monetary Policy Committee (MPC) will vote to keep rates on hold until there is clarity over a deal and most likely after the UK has quit the EU on March 29.

Bank of England
Governor Mark Carney came under heavy political fire after the Bank’s doomsday Brexit report (Daniel Leal-Olivas/PA)

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.

Investec economist George Brown said: “Given the prevailing Brexit uncertainty, we expect policymakers to refrain from altering any aspects of its monetary policy toolkit.”

Experts believe if a deal is sealed, the Bank will want to resume its “gradual and limited” rate rises with another hike in 2019.

Investec said there is a chance of another increase – to 1% – as soon as February, although others believe it will be May at the earliest.

Howard Archer, chief economic advisor to the EY ITEM Club, said: “Even if the UK does leave the EU with a deal, the Bank of England may well delay hiking interest rates to see how the economy is performing in the aftermath of the UK’s departure.”

The latest economic indicators show the toll Brexit is already taking, with gross domestic product (GDP) easing sharply to 0.4% in the three months to October, against 0.6% in the third quarter.

November’s purchasing managers’ index reading also signalled the weakest expansion in the dominant services sector for two and a half years.

However, this pales in comparison to the effects that a cliff-edge Brexit would have on the economy, according to the Bank’s recent doomsday no-deal analysis.

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%.

Mr Brown said the MPC is likely to want to “avoid getting bogged down in the Brexit quagmire” at this month’s rates announcement after “it strayed into the political crosshairs” with the much-criticised Brexit scenario report.

He believes that, setting current Brexit uncertainties to one side, the outlook is not so gloomy and there is hope for demand and investment to bounce back in the first half of next year.

Recently announced Budget measures are set to act as a further boost and the MPC has already said it would “assess the implications” of these at its December meeting.

Allan Monks, an economist at JP Morgan Chase, added the Bank is likely to reiterate rate guidance implying more hikes on the way in 2019 to combat inflation.

While the latest official figures revealed Consumer Prices Index inflation fell to 2.3% in November from 2.4% on October, other inflation pressures are building as wage growth firms.