Bank of England says prospects for UK economy lowest since second World War

The Bank of England on Thursday voted to keep interest rates on hold at 0.75 per cent as its Monetary Policy Committee decided the improvement in business sentiment since the election made an immediate cut unnecessary.

But on the eve of Brexit, the bank dealt a blow to Boris Johnson's new government, further downgrading its view of the underlying prospects for the economy to their lowest since the second World War.

The MPC estimated Britain’s economy would be able to grow at only an average rate of 1.1 per cent over the next three years without sparking damaging inflationary pressure, less than half chancellor Sajid Javid’s ambition of boosting the growth rate towards 2.8 per cent.

Longer term difficulties for the UK economy as it transitions away from the EU, however, did not dominate the committee’s immediate decision on interest rates. The MPC again voted 7 to 2 in favour of holding rates at 0.75 per cent which it expected would keep inflation rising gently up to its 2 per cent target within three years.

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The majority thought a stabilisation in the global economy since December, a reduction in global trade tensions and better UK survey data of households and companies, “supported the forecast of a near-term recovery in growth”.

This view came despite the committee remaining uncertain about whether the economy would avoid recession in the months ahead. The BoE estimated growth would stagnate in the fourth quarter and that there was a 38 per cent chance the economy is currently in recession with output lower in the first quarter than a year earlier.

Monitor

“The committee would monitor closely the extent to which these early indications of an improved outlook were sustained and followed through to the hard data on domestic activity in coming months,” the minutes of the MPC meeting said.

The pound climbed following the decision to hold interest rates, trading 0.4 per cent higher at $1.3080 against the dollar. UK government bonds fell, pushing the 10-year gilt yield 0.02 percentage point higher to 0.52 per cent.

Ahead of the decision, markets had been pricing in close to a 50 per cent chance of a cut, meaning many investors were positioned for lower rates. – Copyright The Financial Times Limited 2020