BoE holds rate at 0.75%; hints at rise if Brexit deal struck
The Bank of England’s monetary policy committee has voted unanimously to keep the base rate at 0.75 per cent.
The rate has now been at this level for nearly a year, having been raised from 0.50 per cent on 2 August 2018.
The minutes reveal that the MPC has cut UK growth expectations for 2019 from 1.5 per cent to 1.3 per cent, and for 2020, from 1.6 per cent to 1.3 per cent.
The MPC also believes that a no-deal Brexit would result in the sterling falling lower than its current levels along with CPI inflation increases and GBP growth slowing down.
Noting that core CPI inflation came in at 1.8 per cent in June, the minutes add that if a “smooth” Brexit occurs and there is some global growth recovery, the committee “judges that increases in interest rates, at a gradual pace and to a limited extent, would be appropriate to return inflation sustainably to the 2 per cent target.”
It adds that sterling would also rise in this situation.
In the accompanying inflation report for August, the bank revised several targets upwards for Q3 2019 – Q1 2020, namely that: expected mortgage approvals for house purchases was changed from 60,000 per month to 65,000 per month, the prediction that the UK house price index would fall by 1.25 per cent in 2019 changed to rising by “just over” 2 per cent in the year to Q1 2020, and that housing investment would fall by 0.50 per cent per quarter would now fall by 0.25 per cent per quarter.
Stenn president Dr. Kerstin Braun, says: “We might have a new prime minister but the fundamentals in the UK remain the same, so this wait and see approach makes sense. The country is experiencing enough uncertainty and drama, with Boris Johnson reaffirming the threat of a hard Brexit, and the potential of a general election in the coming months.
“The real worry is the strength of the pound, which has now reached a 31-month low. Regardless of the Bank of England’s actions, there will still be a downward pressure on sterling. A lower pound rate will benefit UK exporters, but will also raise the consumer price for imported items such as food and fuel. And since the UK is a net-importer, the poor exchange rate is going to be felt across the board.”
Meanwhile, Santander UK chief economist Frances Haque comments: “With the uncertainty over the outcome of Brexit still hanging in the air and the increased possibility of a no-deal Brexit, the decision to hold rates will not be a surprise to the market.
“Although the economic data published for the second quarter of this year has been lacklustre, many of the fundamentals such as low unemployment and strong wage growth remain, yet the MPC clearly remains cautious in its approach.
“Until there is more clarity on the final outcome of Brexit, it is unlikely we will see a rate rise this year, with the market implying that a cut is more likely.”
Source: Mortgage Strategy