The Bank of England on Thursday opted against cutting interest rates amid signs of improvement in the British economy in the run-up to Britain’s imminent departure from the European Union.
The bank said in a statement that its Monetary Policy Committee voted 7-2 to keep the key U.K. interest rate unchanged at 0.75%. The committee split the same way in December, but the strong vote in favor of holding expressed the day before Brexit came as somewhat of a surprise.
Earlier this month, some rate-setters indicated they might be in a position to reduce interest rates.
But the big general election win by Prime Minister Boris Johnson’s Conservative Party in December appears to have eased some of the uncertainties that have weighed on the British economy for the past few years. With a solid majority in Parliament, Johnson pushed through his Brexit withdrawal bill, allowing Britain to leave the EU in an orderly fashion on Friday.
With Brexit clarity emerging, there has been an improvement in some survey data, enough for a majority of members on the bank’s rate-setting panel to hold their fire.
“So far, good enough,” Bank of England Governor Mark Carney told a press briefing.
The decision helped support the pound, which in mid-afternoon London trading was 0.6% higher at $1.3093.
Thursday’s meeting was Carney’s last at the bank’s helm. He leaves in March after seven years as governor, and will be replaced by former deputy Andrew Bailey.
“I don’t have a regret,” Carney said when asked if he had any with regard to monetary policy moves during his tenure.
Whether interest rates move in the coming months – up or down – will hinge on whether the recent survey upturn translates into an improvement in the real economy.
“These are still early days,” Carney said.
Most economists think Britain’s economy will have done well to grow more than 1% last year, which would be the lowest yearly rate since the recession ended a decade ago. The bank isn’t expecting anything better over the coming two years, as it downgraded its growth forecasts for 2021 and 2022 to 0.8% and 1.4%, respectively — partly reflecting its view that Britain’s departure from the EU is economically damaging.
If there’s no sign of improvement from an anticipated flat fourth quarter, interest rates could be cut soon, not least because inflation, at 1.3%, is running at its lowest annual rate since late 2016.
“Policy may need to reinforce the expected recovery in growth,” the committee said, according to the minutes of its meeting.
However, if the rebound materializes, then “some modest tightening of policy may be needed to maintain inflation sustainably at the target.”
The minutes showed that the majority of rate-setters think U.K. growth will pick up a tad in 2020, supported by a more stable global economy, a further decline in Brexit uncertainties and expectations the British government will loosen the purse springs.
According to the minutes, the two rate-setters who backed a cut in the main rate to 0.5% — Jonathan Haskel and Michael Saunders — thought that with growth weak and inflation low, “the economy had a modest but rising margin of spare capacity.” They also noted that the improvement in survey data hasn’t provided a clear guide to real-world developments.
Brexit uncertainty has been largely to blame for tepid growth since the U.K. voted to leave the EU in June 2016. Firms held back investment amid fears that Britain would leave the EU without a divorce deal, while consumers also became cautious.
Some Brexit uncertainty remains, as it’s still not clear what the economic relationship between Britain and the EU will look like beyond the end of 2020.
After Britain officially leaves the EU on Friday, it goes into a so-called transition period until the end of the year. During the transition, the country will remain part of the EU’s tariff-free single market and customs union. Johnson has said that he won’t request an extension to that transition period and that 11 months represents ample time to secure a comprehensive new trade deal between Britain and the EU for goods and services.
Without a deal, it’s possible that tariffs and other restrictions will have been imposed on trade between the two by this time next year — a scenario that most economists think would sink the British economy into recession.
Carney said Brexit is one of the reasons why Britain faces a decade of “potentially profound structural change.”
In addition to negotiating a new trading relationship with the EU and carving out other ones around the world, Carney said the British economy will have to adapt to new immigration rules, big infrastructure projects as well as the transition to a low-carbon economy.