The Bank of England has kept interest rates on hold at 0.75% amid heightened no-deal Brexit fears and as UK growth falters.
Policymakers on the Bank’s nine-strong Monetary Policy Committee (MPC) voted unanimously to keep rates unchanged as it cautioned the “downside risks” to growth had increased since its last set of forecasts in May.
The Bank trimmed its expectations for second quarter growth, predicting gross domestic product will remain flat against a previous forecast for 0.2% expansion, after official data showed the economy shrank by a worse-than-feared 0.4% in April.
But the Bank reiterated that “gradual” and “limited” rate hikes would be needed over the next three years to keep inflation to its 2% target.
It comes after key policymakers at the Bank have been banging the drum recently for the need to raise rates soon.
In the minutes of the latest MPC meeting, the Bank said: “Downside risks to growth have increased. Globally trade tensions have intensified. Domestically, the perceived likelihood of a no-deal Brexit has risen.”
It added that increased Brexit uncertainties had weighed further on the pound.
The stockbuilding boost that saw growth accelerate to 0.5% in the first quarter ahead of the original March 29 Brexit deadline had begun to unwind in the second quarter, as predicted, the Bank said.
It said GDP data was “erratic” but overall suggested growth had weakened year-on-year in the first half.
Sterling lost some of its early gains on the news, but was still trading 0.4% up against the dollar at 1.27.
Against the euro, the pound was down, 0.2% at 1.12.
The Bank also noted in the minutes that business investment – which had been falling amid Brexit worries – rose by 0.5% in the first quarter, but added there were “no clear signs that investment growth would pick up ahead of the October Brexit deadline”.
In a dose of good news for households, it said falling energy prices are set to see inflation fall below the 2% target later in 2019, with official figures on Wednesday showing the Consumer Prices Index dropped to 2% in May from 2.1% in April.
The decision follows comments from MPC members recently laying the foundations for the need to raise rates in the event of a smooth Brexit.
The Bank’s chief economist Andy Haldane said last weekend that the time was nearing “when a small rise in rates would be prudent to nip any inflationary risks in the bud”.
Ben Broadbent, deputy governor for monetary policy, and fellow MPC member Michael Saunders, have also recently told MPs on the Treasury Select Committee that financial markets are not pencilling in rate hikes soon enough.
This follows similar comments from Bank governor Mark Carney at the May inflation report, when he said investors were wrong to price in just one rise over the next three years.
Last month’s report saw the Bank up its forecasts for UK growth to 1.5% this year, up from 1.2% predicted in February, and to 1.6% in 2020 and 2.1% in 2021.
But economists believe that despite the recent hawkish comments from the Bank, it will sit on its hands until the Brexit outcome is clear.
Howard Archer, chief economic adviser at EY Item Club, said: “With the economy clearly having a difficult second quarter and likely to be hampered by prolonged Brexit uncertainties, we believe the odds strongly favour the Bank of England keeping interest rates at 0.75% through 2019.”
James Smith at ING said: “The fact that Bank of England policymakers are flagging that the perceived risk of a no-deal Brexit is rising suggests that interest rates are unlikely to rise this year, despite recent signals that markets may be underestimating future tightening.”