BoE leaves rates on hold amid growing Brexit uncertainty

The Bank of England stood pat on interest rates on Thursday, as widely expected, amid growing Brexit uncertainty.

The Monetary Policy Committee voted unanimously to keep rates at 0.75%. Meanwhile, the BoE trimmed its forecast for British quarterly economic growth in the last three months of 2018 to 0.2% from 0.3%. It expects growth in the first quarter of 2019 to be around that level also.

The bank voted unanimously to maintain the stock of gilt and corporate bond purchases at £435bn and £10bn, respectively.

The BoE pointed to the fact that Brexit uncertainties were weighing on UK financial markets. UK bank funding costs and non-financial high-yield corporate bond spreads have risen sharply and by more than in other advanced economies, it said. In addition, it noted that UK-focused equity prices have fallen materially, while sterling has depreciated further and its volatility has risen substantially.

"Brexit uncertainties have intensified considerably since the committee’s last meeting," the meeting minutes said.

"The further intensification of Brexit uncertainties, coupled with the slowing global economy, has also weighed on the near-term outlook for UK growth."

The BoE also said UK CPI inflation is likely to drop below 2% in the coming months due to declining in oil prices.

Tom Stevenson, investment director for personal investing at Fidelity International, said: "With Brexit as far from resolution as ever, Mark Carney has rightly put monetary tightening on hold in the UK. There will be plenty of time to normalise interest rates after next March.

"The Monetary Policy Committee voted unanimously for no change in base rate today. This is unsurprising in light of the gloomy tone of the comments that accompanied the decision. In particular, the Bank highlighted the intensification of Brexit uncertainties since the committee’s last meeting and the impact of these on financial markets."

Stevenson said it would be surprising if interest rates rose by more than one quarter point in 2019, while the rate of tightening will most likely remain slow and steady throughout 2020.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: "On balance, we continue to think that the MPC won’t wait for signs of a recovery to emerge in the data and will raise Bank Rate to 1.0% in May, once MPs have signed off a Brexit deal late in Q1. But a longer delay certainly is possible, given the risk that the article 50 negotiating period might be extended, potentially keeping growth below-trend for longer, and the tail risk of a no-deal Brexit."

TD Securities said: "Brexit is clearly becoming an increasing concern to the MPC, as evidenced by its frequent appearance in the summary. We sense that the MPC is becoming less certain about the 'smooth transition' assumption underlying its forecasts. Indeed, the probability that Article 50 needs to be extended by a few months is increasing materially, in our view."