United Kingdom: BoE leaves rates unchanged in December, downgrades Q4 growth forecast
December 20, 2018
At its meeting ending on 19 December, the Monetary Policy Committee (MPC) of the Bank of England (BoE) voted unanimously to keep the Bank Rate unchanged at 0.75%. The Bank was also in full agreement to maintain the stock of investment-grade corporate bond purchases at GBP 10 billion and to maintain the total stock of UK government bond purchases at GBP 435 billion, financed by the issuance of Central Bank reserves. All decisions were in line with market expectations.
The decision to stay put in December came despite intensifying wage pressures and slightly above-target inflation, which in other circumstances could have encouraged the Bank to raise rates. However, Brexit uncertainty is now weighing increasingly on the economy, with banks’ funding costs and corporates’ bond spreads rising, business investment likely weak and the all-important services sector losing steam, as evidenced by November’s PMI reading. As a result, the BoE downgraded its growth forecast for Q4 from 0.3% to 0.2%. Any rate hike in December would have risked further dampening already-fragile economic activity.
In its communiqué, the BoE adopted a more hesitant stance, and placed greater emphasis on the impact that Brexit is having—and could have over the coming months—on the economy. That said, the Bank still reiterated its guidance that interest rates are expected to rise gradually and to a limited extent going forward, to temper increasing domestic cost pressures. This guidance is based on the assumption of a smooth adjustment to the future trading relationship with the EU; if the UK leaves the EU without a deal in place, rates could stay put or even be cut to support the economy.
UK Interest Rate Forecast
Our panelists expect the Bank Rate to end 2019 at 1.07% and 2020 at 1.37%.
Author: Oliver Reynolds, Economist