UK central bank cuts growth forecast, holds rates

The Bank of England (BoE), the UK’s central bank, cut its growth forecasts on Thursday amid increased Brexit concerns and a slowing global economy.

However the UK central bank gave no indication that it was considering lowering interest rates.

The BoE’s updated forecasts assume the UK avoids a Brexit “shock” and it now projects growth of 1.3% for 2019 and 2020, down from 1.5% and 1.6% respectively in its previous forecasts.

A day after the US Federal Reserve reduced rates for the first time since the global financial crisis, the UK central bank said it still expects to raise borrowing costs gradually.

The BoE’s Monetary Policy Committee (MPC) voted 9-0 to keep rates unchanged at 0.75% and said rates could move either way — whatever form Brexit takes.

The UK Institute of Directors’ chief economist Tej Parikh said: “All eyes will be on the MPC’s September meeting.

“If a disorderly exit from the EU is on the cards, the bank must not shy away from lowering interest rates in advance to support businesses and households through the turbulence.”

The Bank of England said in its statement: “At its meeting ending on 31 July 2019, the MPC voted unanimously to maintain Bank Rate at 0.75%,”

“The Committee voted unanimously to maintain the stock of sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, at £10 billion. 

“The Committee also voted unanimously to maintain the stock of UK government bond purchases, financed by the issuance of central bank reserves, at £435 billion.

“Since May, global trade tensions have intensified and global activity has remained soft. 

“This has led to a substantial decline in advanced economies’ forward interest rates and a material loosening in financial conditions, including in the United Kingdom. 

“An increase in the perceived likelihood of a no-deal Brexit has further lowered UK interest rates and led to a marked depreciation of the sterling exchange rate.

“Brexit-related developments, such as stockbuilding ahead of previous deadlines, are making UK data volatile. 

“After growing by 0.5% in 2019 Q1, GDP is expected to have been flat in Q2, slightly weaker than anticipated in May. 

“Looking through recent volatility, underlying growth appears to have slowed since 2018 to a rate below potential, reflecting both the impact of intensifying Brexit-related uncertainties on business investment and weaker global growth on net trade.  

“Evidence from companies, up to the middle of July, suggests that uncertainty over the United Kingdom’s future trading relationship with the European Union has become more entrenched …”