Bank of England slashes estimates for UK economic growth
The Bank of England on Thursday slashed its estimates for UK economic growth this year and next, one day before the country exits the European Union.
It came as BoE policymakers, in governor Mark Carney's final monetary policy committee (MPC) meeting, voted to keep its main interest rate at 0.75 per cent by a 7-2 majority. "The question facing the MPC at this meeting was whether the new decade would start with a bang," Carney told a press conference, adding that he had "no regrets" over his monetary policy record at the BoE since taking the reins in 2013.
Some analysts had expected the Canada-born central banker to have joined the ranks of those demanding a quarter-point rate cut to 0.50 per cent.
The minutes of the latest BoE meeting showed that two doveish policymakers had cited "downside risks" to the bank's projections arising from "Brexit uncertainties and a weaker world outlook".
While not agreeing to a rate cut to help prop up Britain's economy, the central bank did predict troubles ahead.
The British economy would expand by only 0.8 per cent this year, the BoE said, down sharply on its previous 1.2 per cent forecast.
In 2021, gross domestic product was expected to grow 1.4 per cent, down on November's estimate of 1.7 per cent.
However the decision to keep the cost of borrowing on hold lifted the pound by around half a per cent against the dollar and euro.
Market analyst, Fawad Razaqzada, said: "With Brexit-related uncertainty receding from last year, I continue to think sterling is headed higher long-term despite what it might do in the short term. There was so much speculation that Mark Carney will bow out with a rate cut on Thursday as domestic data failed to improve in the immediate aftermath of the general election, which proved decisive in so far as the direction of Brexit was concerned. Well, that didn't happen as only two MPC members voted for a rate cut and the pound shot swiftly higher in response. With interest rates already being so low, a rate cut would not have made a material impact on the economy. But the BoE now has room for manoeuvre should the outlook deteriorate further."
Similarly, Deloitte economist Debapratim De, said: "Given growing expectations of a rate cut this month, the overwhelming vote in favour of holding rates comes as a surprise," said "The post-election bounce in business sentiment... seems to have bought the bank some time," he added in reference to the convincing election victory in December for Prime Minister Boris Johnson's Conservative party that unlocked Brexit.
Britain departs the EU on Friday ahead of an 11-month transition period during which time Johnson's government will seek to strike new trade deals with the EU and countries worldwide.
Carney - soon to become UN special envoy on climate action and finance - steps down as BoE chief in March.
Andrew Bailey, head of the UK's Financial Conduct Authority regulator, replaces Carney after the incumbent agreed to put back his departure three times to help steer the British economy through Brexit's delays.
An economic boost provided by the post-election political stability meanwhile is not expected to have a lasting impact despite government promises of major infrastructure spending.
The near-term health of Britain's economy will also be dictated by how key events - ongoing US-China trade talks and fallout from the spreading deadly coronavirus - will impact global growth, according to analysts.
Carney, who became a British citizen during his time as BoE governor, took up the post in July 2013 with the UK economy struggling to recover from the global financial crisis and the BoE's main interest rate at a then record-low 0.50 per cent.
Following Britain's 2016 referendum vote in favour of leaving the European Union, Carney led the central bank in slashing the rate to a new low of 0.25 percent.
It rose back to 0.75 per cent to help curb inflation caused by a Brexit-fuelled weak pound pushing up import costs.
Sterling gained on Thursday after the Bank of England held interest rates at 0.75per cent, defying money markets that had seen a 50 per cent probability of a cut to help the economy.
The pound strengthened and the FTSE faced losses on the Bank of England's decision to leave interest rates unchanged - but investors should sit tight and wait for the 2020 Budget in March. This is the warning from the founder and CEO of deVere Group, Nigel Green, as the UK's central bank announced it is keeping interest rates at the current 0.75 per cent.
Green said: "As the market had widely expected, the Bank of England voted to maintain the interest rate at 0.75 per cent. The decision was made, we can assume, because the underlying economic data is ambiguous rather than compelling, and we have yet to see how much fiscal expansion the government is set to do. The announcement has caused the pound to strengthen and FTSE 100, the UK's leading stock index, to take a mild hit because of the translation effect of a stronger sterling on overseas earnings."
Following the move, interest rate futures moved to almost price out a rate cut at the March meeting as well, reinforcing the pound's gains. Money markets are still pricing in a quarter-point reduction by September, however.
"Both the hold and the vote will add upside pressure for the pound," Neil Jones, head of FX hedge fund sales at Mizuho said.
Sterling rose to $1.3109, up 0.7 per cent on the day and its highest since last Friday. Against the euro, the currency gained 0.5 per cent to 84.15 pence.
The meeting, the last under Governor Mark Carney, was one of the least predictable for years. Money markets had factored in a 50 per cent probability of a 25-basis-point rate cut.
Britain's economy struggled at the end of 2019, prompting several policymakers to say this month they would vote for a rate cut unless data improved. Carney said earlier this month a case could be made for a precautionary cut.
But economic momentum has shown signs of picking up since December's general election, the BOE said, adding that signs of global stabilisation also meant stimulus was not needed yet.
The Monetary Policy Committee remained split along 7-2 lines as before, with external members Michael Saunders and Jonathan Haskel again voting to lower rates.
The benchmark FTSE 100 equity index fell 1.5 per cent to session lows as the pound rose. The mid-cap FTSE 250 benchmark rose, then headed towards its lows for the day, losing 0.8per cent
Ten-year British government bond yields, which had dropped to three-and-a-half-month lows of 0.484 per cent earlier, rose after the meeting to 0.53per cent.
Analysts expect sterling's strength to be limited. More positive data on an economic rebound is needed before the currency could move much higher, they said.
Investors are also wary as Britain officially leaves the European Union on Friday, setting the clock ticking on an 11-month deadline to reach a trade agreement with the EU.
The BoE decision prompted money markets to slash their expectations for a rate cut in March, the month its new governor, Andrew Bailey, takes over. They now see just a 16 per cent probability of a 25 bps cut, versus 80 per cent before the announcement.
Dean Turner, UK economist at UBS Wealth Management, said recent flash PMIs signalled a post-election economic recovery but added that the economy was likely to hit more obstacles.
"Therefore we still expect the BoE to cut rates at some point in the next six months to give the economy additional support," Turner said.
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