The Bank of England slashed the growth forecasts for the UK economy on Thursday, saying the outlook remained highly sensitive to the effects of Brexit, as policymakers left the key interest rate and bond purchases unchanged.
“UK economic growth slowed in late 2018 and appears to have weakened further in early 2019,” the bank said.
“This slowdown mainly reflects softer activity abroad and the greater effects from Brexit uncertainties at home.”
The nine-member Monetary Policy Committee, led by Governor Mark Carney, held the bank rate unchanged at 0.75 percent in line with economists’ expectations.
The previous change in the bank rate was a quarter-point hike in August and the rate is now at its highest level since 2009.
The stock of corporate bond purchases was kept at GBP 10 billion and that of government bond purchases at GBP 435 billion.
Both policy decisions were unanimous.
In its latest Inflation Report, released Thursday, the bank lowered the growth forecast for this year to 1.2 percent, the slowest pace in a decade, from 1.7 percent predicted in November. That was the biggest cut in the projection since the 2016 referendum.
Growth projections for 2020 was also lowered to 1.5 percent, while the outlook for 2021 was raised to 1.9 percent. The previous forecast for both years was 1.7 percent.
Brexit uncertainties had intensified considerably since the Committee’s November meeting, the bank reiterated.
“The fog of Brexit is causing short term volatility in the economic data, and more fundamentally, it is creating a series of tensions in the economy, tensions for business,” BoE Governor Carney said.
The bank cited survey evidence that the Brexit uncertainty has continued to rise and is weighing on business investment and housing activity.
Despite the adverse impact of Brexit, the central bank said “were the economy to develop broadly in line with its Inflation Report projections, an ongoing tightening of monetary policy over the forecast period, at a gradual pace and to a limited extent, would be appropriate to return inflation sustainably to the 2 percent target at a conventional horizon.”
The bank noted that the market expectations for the path of Bank Rate have fallen and now markets are seeing a gradual rise in the rate to around 1.1 percent by the end of 2021 versus 1.4 percent seen in November.
The UK is set to leave the European Union on March 29, but Prime Minister Theresa May is yet to figure out how this is going to happen – whether the country would leave the bloc with some deal on trade and other crucial matters or quit without any arrangements.
The central bank had warned earlier that a no-deal Brexit would cause a severe recession in the UK, the kind not even seen during the global financial crisis a decade ago.
The central bank’s analysis projected that inflation could hit 6.5 percent as the pound dives in a no-deal or disorderly Brexit.
Governor Carney also predicted that food prices could jump as much as 10 percent if there is a 25 percent slump in the pound due to a no-deal Brexit.
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