BoE holds interest rates and forecasts poor economic growth in 2019

Written by Oliver Wade

The Bank of England’s (BoE) monetary policy committee (MPC) has, as expected, voted unanimously to leave interest rates unchanged at 0.75 per cent, warning of a UK economic slowdown.

The bank has forecast growth of 1.2 per cent this year, down from its previous forecast of 1.7 per cent made in November, citing that it had seen further evidence that businesses were being cautious as we approach Brexit, including evidence from its own survey of firms.

In its Quarterly Inflation Report, the bank highlighted that the UK was being hit by slower-than-expected growth in the Eurozone and China, adding that growth “appeared to have slowed at the end of 2018 and is expected to remain subdued in the near term”.

The bank said that it sees a one-in-four chance of the economy slipping into recession in the second half of 2019.

According to the BoE, there has been an “intensification” of Brexit uncertainties, with its survey revealing that half of firms had started putting contingency plans in place in case of a no-deal Brexit, while a fifth of firms had taken on additional warehouse space.

It also highlighted a sharp fall in business investment towards the end of 2018, stated that: “Uncertainty appears to have risen recently, and may have weighed on investment by more than had been expected in August.”

Furthermore, the MPC has decided to leave the bank’s base rate at 0.75 per cent, where it has been since the BoE last increased rates last August.

However, economists have predicted that, once the uncertainty of Brexit is over, the economy will accelerate and the bank will have to increase interest rates to prevent it from overheating.

Commenting on the decision, XPS Pensions Group chief investment officer Simeon Willis said: “This result is highly unsurprising.

"Nothing has really changed in terms of the UK’s economic prospects since the MPC’s last decision to keep rates the same in December - the direction of the economy is still dogged by the potential of a no-deal Brexit.”

Echoing this, Cardano head of investment strategy Hemmo Hemmes added: "The Bank of England is very much caught between a rock and a hard place. From a domestic perspective, capacity is tight and while the BoE may have been eyeing a hike, the current backdrop is less than accommodative.

"The global economy and Brexit are putting a brake on growth and so the decision to maintain the status quo, at least for now, makes sense. Given the high level of uncertainty about Brexit, we advise our clients not to take any risk on the direction of UK rates.”

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