Interest Rate in United Kingdom

United Kingdom - Interest Rate

BoE leaves rates unchanged, slashes growth forecasts

At its meeting ending on 6 February, 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 February came against a backdrop of ebbing price pressures. Inflation has declined notably since August and rested only marginally above the Bank’s 2.0% target in December. Moreover, economic activity is weak—the service sector flatlined in January and retail sales have been lackluster in recent months—while the international panorama has become less favorable. Compounding concerns for the BoE, there is still considerable uncertainty over the outcome of the Brexit process, with the UK currently on course to leave the EU without a deal at the end of March. This confluence of factors led the BoE to adopt a wait-and-see approach.

Along with its decision on rates, the BoE released the February Inflation Report, in which the Bank slashed its GDP growth projections for 2019 and 2020 to 1.2% and 1.5% respectively, from 1.7% and 1.7% in November’s report. Weaker global momentum and Brexit uncertainty hampering business investment were cited as the key factors driving the downgrade. Meanwhile, the Bank’s inflation projections were largely unchanged at 2.0% and 2.1% in Q4 2019 and Q4 2020 respectively.

In its communiqué, the BoE reiterated its guidance that monetary policy will likely tighten going forward, albeit gradually and to a limited extent. The Bank also reemphasized the impact Brexit could have on monetary policy decisions, and left the door open to monetary easing in the case of a disorderly withdrawal. Assuming an orderly EU withdrawal, domestic price pressures are likely to build on emerging capacity constraints, which would necessitate subsequent rate hikes. Virtually all FocusEconomics panelists see the BoE raising rates at least once this year to ensure inflation returns to target.

According to Azad Zangana, Senior European Economist at Schroders: “Overall, the optics of the latest Inflation Report would suggest that the BoE is slowly changing its mind about raising interest rates any further. However, upon closer inspection of the details, much of the forecast downgrade is attributed to what the Bank expects will be short-term factors. […] As a result, we re-affirm our forecast that, assuming an orderly Brexit, the Bank will raise its main policy interest rates at the first opportunity”.

UK Interest Rate Forecast

Our panelists expect the Bank Rate to end 2019 at 1.07% and 2020 at 1.39%.