After a nerve-wracking morning, the Bank of England (BoE) has left UK interest rates unchanged at 0.75%. 

The bank’s Monetary Policy Committee (MPC) voted unanimously today to keep rates unchanged, warning that “entrenched uncertainty” around Brexit could drag on the UK economy. 

Policymakers believe that the UK will avoid a recession, but that Brexit limbo and trade concerns were weighing on the economy and would only keep rates lower for longer.

The bank’s MPC also warned that “Brexit-related developments are making UK economic data more volatile”, and would stagger the economy and lead to weaker growth, higher inflation and a further drop in the value of the pound.

The Bank lowered its forecast for GDP growth in the third quarter from 0.3% to 0.2%. However, interest rates could fall or rise if the UK should leave the European Union without a deal in place. 

Policymakers would need to balance raising interest rates in an attempt to keep a lid on inflation, against cutting them to support the growth of the economy. 

Central banks across the world have cut rates in recent weeks in response to a brewing economic storm. Global growth has been hit by the intensified US-China trade war, while the US yield curve has inverted several times, indicating a potential US recession. 

Yesterday, the US Fed announced a 25 basis point interest rate cut to a range of 1.75% to 2%, while the ECB also cut rates for the first time since 2016 last week. 

The MPC summarised that “the outlook for global growth has weakened” since its last meeting and cited the intensifying trade war as the major factor.

How does the Bank see the outlook?

In the three months to June, the UK economy decreased by 0.2%. The Bank expects the economy to increase by 0.2% in the third quarter of this year.

This would mean the UK would avoid a technical recession, despite it being weaker than the 0.3% growth predicted last month.

According to the minutes of the meeting: 

The longer those uncertainties persisted, particularly in an environment of weaker global growth, the more likely it was that demand growth would remain below potential.

The BoE signalled its next move could be to raise rates rather than cut them. 

If the UK has a smooth sailing exit from the European Union, and the global economy recovers, the Bank could raise rates “at a gradual pace and to a limited extent”.

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Dalia Hilmi
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