Britain’s central bank looks set to keep interest rates unchanged next week, despite a weak economic outlook, as it awaits a snap election that could reshape Brexit and bring more public spending.
The Bank of England, unlike the US Federal Reserve and the European Central Bank, has not cut rates as the trade war between the United States and China caused a global economic slowdown. Britain’s economy has weakened, too, although the BoE is unlikely to make much change to its August forecasts for annual growth of 1.3 per cent this year and next. That is about a percentage point below the growth rate before June 2016 Brexit referendum.
Despite the slowdown, BoE has hesitated to step away from its long-term message that it expects to gradually raise rates from post-financial crisis lows as a jobs boom and robust wage growth suggests there is not much slack in the economy.
Complicating the outlook for the BoE had been the risk that Britain might leave the European Union without a transition deal on October 31, requiring decisive action by the central bank.
Now Brexit has been postponed for a third time, until January and Prime Minister Boris Johnson has called an early election for December 12 to try to get a majority to pass his new, harder Brexit deal through parliament. If the opposition Labour Party wins, it will seek to negotiate a new deal and hold a referendum on it, potentially overturning the decision to leave the EU.
“It’s a nightmare for them, really,” HSBC economist Liz Martins said, referring to the BoE’s Monetary Policy Committee.
“Against that backdrop they will err on the side of caution, sound dovish, and do nothing.”
The BoE’s Bank Rate stands at 0.75 per cent, unchanged since a quarter-point increase in August 2018.
Two external MPC members, Michael Saunders and Gertjan Vlieghe, have said the BoE cannot ignore the damage that Brexit uncertainty is doing, and a rate cut might be needed soon.