Bank Of England Trims Growth Outlook, Holds Rates As Brexit Looms

The Bank of England (BoE) on Thursday (1) trimmed its growth forecasts as Brexit approaches and froze interest rates but warned it could alter monetary policy "in either direction" after Britain leaves the European Union.

The central bank's nine-strong Monetary Policy Committee (MPC) voted unanimously at a regular policy meeting to keep its key rate at 0.75 per cent and maintain its quantitative easing stimulus, it announced in a statement.

The BoE predicted the economy will expand by 1.3 per cent this year in a downgrade of prior guidance of 1.4 per cent, blaming slowing global economic growth.

It now expects gross domestic product (GDP) to increase by 1.7 per cent in 2019, the year in which Britain will leave the European Union. That was down from 1.8 per cent forecast previously.

The institution had last hiked rates in August by a quarter-point to help tame Brexit-fuelled UK inflation and remains in wait-and-see mode.

Sterling hit a fresh one-week peak at $1.2934 on the news, having rebounded on reports of a post-Brexit financial services deal.

Outlook 'Depends Significantly' On Brexit

The forecasts are based on the assumption of a smooth transition period, but there is growing unease on markets about a chaotic no-deal Brexit amid stalled talks between Brussels and London.

"The economic outlook will depend significantly on the nature of EU withdrawal, in particular, the form of new trading arrangements, the smoothness of the transition to them and the responses of households, businesses and financial markets," the BoE said, echoing its previous remarks.

"The implications for the appropriate path of monetary policy will depend on the balance of the effects on demand, supply and the exchange rate.

"The MPC judges that the monetary policy response to Brexit, whatever form it takes, will not be automatic and could be in either direction.

"At this meeting, the MPC judged that the current stance of monetary policy remained appropriate."

Nevertheless, the bank warned that business investment has screeched to a complete halt overall this year as uncertainty wreaks havoc on company spending decisions.

And it reiterated its stance that monetary policy would gradually tighten over the forecast period in order to return inflation to its 2.0 per cent target.

UK annual inflation slid to 2.4 per cent in September on falling food prices, from a six-month high of 2.7 per cent in August.

The BoE also highlighted downside risks for the global economy, including tightening financial conditions in emerging markets, slowing eurozone growth and trade war tensions that may yet escalate further.

Thursday's news comes just days after the UK government ramped up its 2019 growth outlook to 1.6 per cent, from 1.3 per cent.

But finance minister Philip Hammond had also cut his 2018 growth guidance to 1.3 per cent from 1.5 per cent in his annual budget statement on Monday (29).

Financial Services Deal?

The pound soared earlier Thursday after The Times reported that London and Brussels have agreed on a preliminary deal that would see UK financial services retain access to European Union markets after Brexit.

British and EU negotiators have struck a tentative agreement on all aspects of a future partnership on services and the exchange of data, the daily newspaper said, citing UK government sources.

Brexit minister Dominic Raab believes a divorce deal with the European Union could be struck by November 21, but EU leaders warn that this would require a breakthrough within days.

Britain is scheduled to leave the EU at the end of March 2019.

BoE governor Mark Carney has already stated that rates could go up or down in the event of a cliff-edge Brexit.

Despite the bump higher in the pound, markets were underwhelmed by the news, according to Laith Khalaf, an analyst at stockbroker Hargreaves Lansdown.

"The Bank of England has left interest rates on hold, surprising precisely no-one," lamented Khalaf.

"A fragile UK economy, softening global demand, and the looming shadow of Brexit leaves little scope for the central bank to do anything more than to sit on its hands for the time being."

 Agence France-Presse