Bank of England votes unanimously to keep rates on hold

The Bank of England has left interest rates unchanged, it announced on Thursday, despite acknowledging that the outlook for the UK economy had weakened.

Following its latest monthly meeting, the Bank’s rate-setting Monetary Policy Committee voted unanimously to keep the cost of borrowing at 0.75%.

It also revised down forecasts for second-quarter growth, from 0.2% to 0.0%. The Bank said: “That in part reflects an unwind of the positive contribution to GDP in the first quarter from companies in the UK and European Union building stocks significantly ahead of recent Brexit deadlines.

“Looking through recent volatility, underlying growth in the UK appears to have weakened slightly in the first half of the year relative to 2018, to a rate a little below its potential. The underlying pattern of relatively strong household consumption growth but weak business investment has persisted.”

The UK currently has record levels of employment and wages are growing again after a period of stagnation, leading to speculation that inflation could rise above the Bank’s 2% target, which could require a rate rise to keep it in check. But the country is also battling weak consumer confidence, a slowing global economy and Brexit.

The MPC said on Thursday that since its May Inflation Report, downside risks to growth had increased.

“Globally, trade tensions have intensified,” it said. “Domestically, the perceived likelihood of a no-deal Brexit has risen. Trade concerns have contributed to volatility in global equity prices and corporate bond spreads.”

Looking ahead, the bank added: “The economic outlook will continue to depend significantly on the nature and timing of the EU withdrawal, in particular: the new trading arrangements between the EU and UK; whether the transition to them is abrupt or smooth; and how householders, businesses, and financial markets respond.

“The appropriate path of monetary policy will depend on the balance of these effects on demand, supply and the exchange rate.” It concluded that the Bank’s response to Brexit would “not be automatic and could be in either direction”.

Tej Parikh, chief economist at the Institute of Directors, the employers’ organisation, said: “Despite a growing number of hawkish signals coming from the MPC, in reality the Bank’s room for manoeuvre is limited until Brexit uncertainty clears.

“With economic activity looking soft in the second quarter, keeping the cost of credit low for as long as possible will be necessary to provide some buoyancy to business and household confidence in a particularly testing period.”

Alessandro Capuano, global head of brokerage and business development at Fineco Bank, said: “While rumours of an imminent interest rise abound, anaemic growth in the UK economy and the prospect of difficult Brexit negotiations looming have stopped the MPC in their tracks once more.

“With CPI-inflation steady, global GDP growth slowing to a 10-year low and every other major central bank either cutting rates or hinting at ease, a rate cut would probably make more sense. The response from the market has been to price out any prospect of a rate hike this year. Meanwhile, domestic inflation is on the rise. Interest rates will at some point need to rise, to keep inflation in check, but without clarity around Brexit tying the hands of the Bank of England, that won’t be any time soon.”

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, argued that the Bank had acknowledged the downside risks to the economic outlook was keeping the door open “to raising the bank rate later this year, if these risks do not crystallise.

“Today’s minutes do no alter our view that the Committee likely will raise the bank rate around the end of the year, when data showing that GDP rebounded in the third quarter will be to hand, inflation pressures will have built further and the Brexit deadline likely will have been extended again.”

However, David Cheetham, chief market analyst at xtb, said: “On the whole, the message is following the theme set by the Bank’s peers in recent days by turning more dovish – and while governor Mark Carney and the MPC have stopped short of delivery as strong a signal as the European Central Bank or the Federal Reserve, it does seem increasingly likely that the next move will be an interest rate cut rather than a hike.”