The Bank of England voted unanimously to keep interest rates on hold at 0.75% on Thursday. However, the monetary policy committee (MPC) signalled that continued Brexit uncertainty amidst a global economic slowdown and a US-China tariff war could result in an interest rate cut before the end of the year
The world’s fifth-largest economy is still yet to finalise Brexit – its exit from the European Union. The central bank warned in the minutes from its September meeting that the uncertainty surrounding Brexit is in danger of becoming entrenched which would cause a weaker economic outlook. The MPC said that further delays to an agreement with the EU would impact negatively business and consumer confidence. The minutes of the meeting said:
“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.”
BoE minutes from September meeting
Prime Minister Boris Johnson has been pushing for an exit on October 31st with or without a deal with the EU. The MPC warned that a no-deal Brexit would lead to higher inflation, weaker growth, and a further devaluation of the pound.
UK Inflation Declines
The BoE warning on higher inflation came on the same day that the Office for National Statistics (ONS) released data which showed that Consumer prices in Britain increased in August at the slowest rate since December 2016.
UK households also enjoyed the fastest wage growth since 2008, whilst prices of goods and services paid by consumers increased at an annual rate of 1.7% in August following a 2.1% rise in July, and lower than market expectations for a 1.9% increase. CPI also remained higher than the 1% rate seen in the Eurozone. The decline in inflation, coupled with a rise in wages should boost consumer purchasing power. Low inflation provides a welcome boost to the UK economy which has been struggling amidst Brexit uncertainty.
The British economy contracted by 0.2% in the second quarter of the year However, the Bank of England expects the economy to expand by 0.2% in Q3. Whilst the 0.2% is less than the 0.3% increase predicted in August, it does mean that the Uk will avoid being in recession, something Germany may not avoid.
FTSE 100 and GBP Higher
Following the interest rate hold and encouraging UK inflation data, the FTSE 100 closed 0.58% higher at 7356.42. The British Pound saw initial losses but rallied to be 0.41% higher against a weakening US Dollar.
