Brexit uncertainty will continue restricting the economy, policymakers say
The Bank of England has indicated that interest rates will continue to remain low as long as there is persistent uncertainty over the UK’s Brexit path.
However, in spite of the Brexit deadlock and the impact of the US-China trade war on the global market, the Bank believes that the UK will avoid a recession in 2019.
Interest rates have been frozen at 0.75 per cent and the Bank’s Monetary Policy Committee has been clear in its position that the economy will be adversely impacted by a no-deal Brexit.
Consequences of no-deal are said to be weakened economic growth, higher inflation and a further fall in the value of sterling.
The Bank indicated that interest rates could either move up or down in a no-deal scenario, with policymakers having to weigh-up raising interest rates to maintain control of inflation against slashing them to try to encourage growth.
But the longer the Brexit impasse persists, the MPC believes that growth will remain weak and inflation low, reducing the pressure to hike up interest rates.
The minutes of the Bank’s recent September meeting read: "The longer those uncertainties persisted, particularly in an environment of weaker global growth, the more likely it was that demand growth would remain below potential.”
However, since Boris Johnson has made clear his desire to pursue a Brexit deal with the EU, policymakers have said that increases in interest rates will have to come over the next three years given the increased likelihood of avoiding a no-deal Brexit.
As it stands, the UK economy is forecast to grow by 0.2 per cent in the third quarter of the year after a 0.2 per cent contraction in the three months to June.
The projected third quarter growth is down on the 0.3 per cent quarterly prediction in August, but it does mean that the UK should avoid falling into technical recession.
On the downside, manufacturing output remains low and policymakers have earmarked the US-China trade war as "having a material negative impact on global business investment growth”, despite the fact that the direct economic impact is thought to be "relatively small".
Addressing the growth, the Bank outlined in the minutes of its meeting that it has been fuelled by strong consumer spending after the weakened value of the pound prompted most families to holiday in the UK rather than travel abroad.
After chancellor Sajid Javid unveiled plans for the government to invest more heavily in individual departments in the latest Spending Review, the Bank has also predicted that the economy should grow by 0.4 per cent in the next three years.