Bank of England set to hold rates ahead of United Kingdom election

Chart showing EUR  USD

Uncertainty about Britain's exit from the European Union has left a strong mark on business confidence and weak economic data make it increasingly likely that the next move by the Bank of England is to reduce interest rates, rather than increase.

The Bank of England's Monetary Policy Committee voted 7-2 to hold its bank rate at 0.75 percent Thursday in a rare split decision a little more than a month before December 12 parliamentary elections.

The lowest ever interest rate the Bank set was 0.25% from August 2016 (in response to the Brexit referendum result) and the highest value was 17% seen in November 1979.

Any deal would have led to a cut in growth forecasts, but increased certainty will help to drive a near-term pick-up in investment growth, the bank added.

If this scenario unfolds, the BoE would still be able to stick to its long-standing message about limited and gradual rate hikes.

Members of the nine-strong MPC voted seven to two in favour of leaving rates unchanged, after members Jonathan Haskel and Michael Saunders made the first call for a cut in more than three years.

But the Bank predicted the impact of Brexit and a slowing global outlook means the United Kingdom economy is set to grow by one per cent less over the next three years compared to forecasts made in August.

The two main political parties are promising to end years of austerity and spend billions on infrastructure - aided by record-low interest rates - to try to fuel growth.

For the others, Britain's economy had not performed much differently than they had expected three months ago but they showed a new openness to cutting rates if things soured.

This will be followed by the post-meeting press conference, where the BoE Governor Mark Carney will explain the QIR and answer questions.

"As we think may be the case for other central banks, uncertainties and divisions may mean the ultimate outcome is to stay on hold", HSBC's Simon Wells and Chris Hare wrote.

The Pound to Australian Dollar (GBP/AUD) exchange rate was relegated to a narrow range this morning as markets contemplate the implications of the latest Bank of England (BoE) rate decision, with the pairing now trading at around AU$1.8626, virtually unchanged from the morning's opening rate. Carney noted: "three-quarters of that rise in growth is driven by domestic factors - the most important of which is a reduction in uncertainty driven by an orderly transition to a new Brexit arrangement".

Based on market pricing for one rate cut over the next three years, the BOE now sees 2020 growth at 1.2% - which would be the worst since 2009 - from 1.3% previously, and the following year at 1.8%, down from 2.3%.

The MPC said that GDP expanded in the most recent quarter, rising 0.4% in the period from June to September, up from previous forecasts of 0.2%.

Inflation, now 1.7%, is forecast to drop to 1.2% in the middle of next year due to lower oil prices and regulatory caps on electricity and water bills. The 2022 growth rate is above Britain's long-term trend and would push inflation back above the BoE's 2% goal, the central bank forecast.



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