Interest Rate in United Kingdom

United Kingdom - Interest Rate

BoE holds fire in August as Brexit uncertainty looms large

At its meeting ending on 31 July, the Monetary Policy Committee (MPC) of the Bank of England (BoE) voted unanimously to keep the Bank Rate unchanged at 0.75%, in line with market expectations. 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.

The Bank of England’s decision to stay put was motivated by rising political uncertainty, tepid growth—the economy likely flatlined in the second quarter—and under-control price pressures, with inflation hovering at or around the BoE’s 2% target in recent months. As a result, the Bank was under little pressure to hike rates. On the flipside, the BoE decided not to follow other central banks in cutting rates as the Bank’s working assumption is still for an orderly withdrawal from the EU. Given the recent lethargic economic performance can be attributed in significant part to Brexit-related fears, growth should recover shortly after such fears subside, as is currently projected by the Bank.

In its communiqué, the Bank of England reiterated its guidance that monetary policy will likely tighten “at a gradual pace and to a limited extent” going forward. However, any hike is only likely once Brexit is out of the way. As such, almost all our panelists see rates unchanged this year, as a swift solution to the Brexit impasse does not appear likely. Crucially, the Bank’s guidance is conditional on a smooth Brexit, which is still far from guaranteed; and, if the UK leaves the EU without a deal, the BoE would likely be forced to cut rates to support the economy.

As James Smith, developed markets economist at ING, states:

“As the Bank is at pains to point out, policymakers are assuming a smooth Brexit path - whereas markets (and their expectations for interest rates) increasingly are not. With Brexit uncertainty set to intensify, we think it is very unlikely the Bank will embark on the tightening that it is still loosely signalling in its statement. Equally though, we think it’s too early to be pencilling in rate cuts, given the likelihood that wage growth will continue to perform solidly over coming months.”

The Consensus is for the Bank Rate to end 2019 at 0.77% and 2020 at 0.95%.