Bank holds rates steady and cuts second quarter growth outlook

The Bank of England has kept interest rates on hold at 0.75 per cent

THE Bank of England has kept interest rates on hold at 0.75 per cent amid heightened no-deal Brexit fears and as UK growth falters.

Policymakers on the Bank's nine-strong Monetary Policy Committee (MPC) voted unanimously to keep rates unchanged as it cautioned the "downside risks" to growth had increased since its last set of forecasts in May.

The Bank trimmed its expectations for second quarter growth, predicting gross domestic product will remain flat against a previous forecast for 0.2 per cent expansion, after official data showed the economy shrank by a worse-than-feared 0.4 per cent in April.

But the Bank reiterated that "gradual" and "limited" rate hikes would be needed over the next three years to keep inflation to its 2 per cent target.

It comes after key policymakers at the Bank have been banging the drum recently for the need to raise rates soon.

In the minutes of the latest MPC meeting, the Bank said: "Downside risks to growth have increased. Globally trade tensions have intensified. Domestically, the perceived likelihood of a no-deal Brexit has risen."

It added that increased Brexit uncertainties had weighed further on the pound.

The stockbuilding boost that saw growth accelerate to 0.5 per cent in the first quarter ahead of the original March 29 Brexit deadline had begun to unwind in the second quarter, as predicted, the Bank said.

It said GDP data was "erratic" but overall suggested growth had weakened year-on-year in the first half.

Sterling lost some of its early gains on the news, but was still trading 0.4 per cent up against the dollar at 1.27.

Against the euro, the pound was down, 0.2 per cent at 1.12.

The Bank also noted in the minutes that business investment - which had been falling amid Brexit worries - rose by 0.5 per cent in the first quarter, but added there were "no clear signs that investment growth would pick up ahead of the October Brexit deadline".

In a dose of good news for households, it said falling energy prices are set to see inflation fall below the 2 per cent target later in 2019, with official figures on Wednesday showing the Consumer Prices Index dropped to 2 per cent in May from 2.1 per cent in April.

The decision follows comments from MPC members recently laying the foundations for the need to raise rates in the event of a smooth Brexit.

The Bank's chief economist Andy Haldane said last weekend that the time was nearing "when a small rise in rates would be prudent to nip any inflationary risks in the bud".

Last month's report saw the Bank up its forecasts for UK growth to 1.5 per cent this year, up from 1.2 per cent predicted in February, and to 1.6 per cent in 2020 and 2.1 per cent in 2021.

But economists believe that despite the recent hawkish comments from the Bank, it will sit on its hands until the Brexit outcome is clear.

Howard Archer, chief economic adviser at EY Item Club, said: "With the economy clearly having a difficult second quarter and likely to be hampered by prolonged Brexit uncertainties, we believe the odds strongly favour the Bank of England keeping interest rates at 0.75 per cent through 2019."

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