The Bank of England said the uncertainty around Britain’s divorce from the European Union was intensifying as it kept interest rates unchanged.
The bank’s Monetary Policy Committee, led by Governor Mark Carney, voted 9-0 to hold the benchmark at 0.75 per cent. All but one of the 61 economists in a Bloomberg survey correctly predicted Thursday’s decision.
“The broader economic outlook will continue to depend significantly on the nature of EU withdrawal,” the minutes of the meeting said. “The monetary policy response to Brexit, whatever form it takes, will not be automatic and could be in either direction.”
The BOE is also grappling with how to exit years of ultra-loose policy alongside the rest of the world’s biggest central banks. The Federal Reserve on Wednesday lifted borrowing costs while cutting the outlook for more hikes next year. The Bank of Japan kept its policy unchanged on Thursday. Sweden raised its benchmark for the first time since 2011.
U.K. policy makers said they now see inflation slowing below the 2 percent target as soon as January after oil prices fell. Nevertheless, stronger-than-anticipated wage growth and weak productivity suggest that underlying inflation pressures are building.
The economic outlook has weakened since the bank’s last round of forecasts in November. While growth was 0.6 percent in the third quarter, the BOE expects 0.2 per cent expansion at the end of the year and about the same in the first three months of 2019.
Ticking Clock
The government’s latest budget, unveiled in November, will probably add about 0.3 per cent to U.K. GDP in the longer term, the minutes said.
If Brexit goes smoothly, policy makers said last month that limited and gradual rate increases will be needed over the next few years to keep inflation in check. But turmoil since then puts that assessment in doubt.
Prime Minister Theresa May is running down the clock before putting her withdrawal agreement to a vote in Parliament. If lawmakers reject the deal, the risk of leaving the EU without a transition period rises.
A disorderly Brexit would put the BOE in crisis-fighting mode -- the pound would fall, fanning inflation, while new trade barriers would put the brakes on growth. The MPC said that the current monetary policy stance is “appropriate” for now, though it expects greater-than-usual short-term volatility in U.K. data.
Investors are no longer fully pricing in another rate increase in 2019. They see about a 60 per cent chance of a quarter-point hike by the end of next year.
In a separate report from regional agents, the BOE said that retail sales appear to be weakening, investment is being put on hold because of Brexit and recruitment difficulties are getting worse.
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