Sunday, 20 August, 2017

Bank of England holds interest rates but warns of Brexit uncertainty

On their marks Unite members and workers in Carney masks picket the Bank’s head office in the City of London Carney under fire in first Bank strike for 50 years by Daniel Binns Published
Heather Davidson | 06 August, 2017, 01:36

"That has certainly helped boost competition in the mortgage market but again underlines that rates won't necessarily remain at the current lows forever".

Mr Carney said Brexit uncertainty "weighs on the decisions of businesses and households and holds down both demand and supply". It says this is due to the fall in the value of sterling continuing to increase prices for consumers.

The deputy governor told the BBC that exporters had experienced a rise in profits thanks to the fall in the pound since last year's vote to leave the EU.

It also downgraded its expectations for United Kingdom economic growth this year, from 1.9% to 1.7%. The MPC now sees growth at 1.6 percent in 2018, down from 1.7 percent, while GDP in 2019 remains at 1.8 percent. The buildup in consumer borrowing also received attention as it has risen to levels last seen before the 2008 financial crisis - this makes raising rates even more hard as borrowers are already struggling to meet obligations in an environment of ultra-low interest rates.

Matthew Brittain, investment analyst at Sanlam UK, said: "This marginally more dovish sentiment has no doubt been helped by the departure of long-time hawk Kristin Forbes, and puts the BoE firmly back on track to its "slow and steady" normalisation approach".

Broadbent also said that while uncertainty is weighing on the economy, people are "holding their nerve".

Sterling fell by as much as 0.9 per cent against the euro during European trading, to 0.90487p.

In a press conference on the central bank's Inflation Report, Governor Mark Carney warned that Brexit is affecting the United Kingdom economy as the nation adjusts to a "new and uncertain" relationship with the EU.

The benchmark rate had been stable at 0.5% from March 2009 to August 2016, when the Monetary Policy Committee chose to reduce it by 25 basis points, in the wake of dire survey data following the Brexit vote. I believe these two factors will keep the BoE on hold for now, but this does not necessarily mean the rally in GBP is over. The 2018 forecast was lowered from 1.7% to 1.6%.

Gross earnings dropped 0.4 percent year-over-year in June, reversing 0.6 percent rise in May, which was revised down from a 0.7 percent gain reported earlier.

Governor Carney suggested the Bank could raise rates next year.

This is the most viable option because the United Kingdom needs to offset the negative implications of Brexit and depreciation in sterling.

"All members agreed that any increases in Bank Rate would be expected to be at a gradual pace and to a limited extent", the bank's monetary policy summary said.

Currently, inflation is running at 2.6%, while wage growth is just above 2%, meaning that regular Brits are now bringing in less in wages than prices are growing, effectively lowering their real incomes.

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