Bank of England governor Mark Carney. Photo courtesy of the Bank of England Flickr page.
The Bank of England announced that it would not be raising interests yesterday, citing the uncertainty of Brexit as the deciding factor. The Monetary Policy Committee voted 9-0 in favour of keeping rates at their current level, not wanting to commit to a prediction for how beneficial or harmful the UK’s exit from the European Union will be next Spring.
In a statement accompanying the MPC minutes, the BoE said:
“Over the past few years, our economy has needed interest rates to stay very low as we recovered from the global financial crisis.
“But things have been changing. Our economy now needs a little less support because it is growing a little faster than it has capacity to and inflation is above our 2% target. To ensure a sustainable return of inflation to the target, we need to keep the economy growing at around its speed limit.
“That is why we raised the official interest rate from 0.5% to 0.75% in August.
“After raising interest rates in August, this month we have left them unchanged. If the economy performs as we expect, we think we will need to raise interest rates a bit more over the next few years. We expect any rises in interest rates to happen at a gradual pace and to a limited extent. Interest rates are likely to remain substantially lower than a decade ago.”
The UK’s central bank also went on to highlight the historic lows of the current interest rates, providing context in an attempt to allay fears of those who have shown concern about rate rises hindering the flow of money and cost of loans.
Compared to the past, interest rates are currently very low. Interest rate rises should be gradual and limited. Find out more in our visual summary: https://t.co/7LyteriXM7 #InflationReport pic.twitter.com/8V5i86uvIJ— Bank of England (@bankofengland) November 1, 2018
BoE governor Mark Carney spoke at a press conference to journalists following the Bank’s announcement, saying that UK firms are “understandably postponing investment” while they wait and see what the future brings, and suggested that regardless of the outcome, UK interest rates are historically low and thus may be raised even in the event of a no-deal Brexit scenario.
“There are circumstances where policy needs to be tightened” - Mark Carney admits interest rates may need to rise in the event of disorderly Brexit, even if there’s a recession. Although he notes No Deal is “not the most likely outcome”.— Joel Hills (@ITVJoel) November 1, 2018
The global rating agency Standard & Poor’s has already issued a warning to the UK that recession will hit in the event of no deal, claiming that rising unemployment would sink household incomes and act as the trigger.
Carney’s logic is similar: he believes that inflation could rise if the Pound slumps, as bad Brexit news has already shown it can have such an impact. EU tariffs on the UK would exacerbate matters, so the interest rates would control inflation, but this is a double-edged sword – controlling inflation this way could severely harm business and household confidence in the UK economy through the increased cost of credit.
Speaking to The Guardian newspaper, Ed Conway of Sky News said such an interest rate rise would not happen, referencing the events of 2016 following the referendum:
“Consider what happened two years ago. The then-chancellor and the Bank warned before the referendum that interest rates might rise if the UK voted leave. Most economists and commentators, myself included, said that this seemed deeply implausible.
“Lo and behold, at the first practicable moment after the referendum the Bank cut interest rates. It even pumped an extra few tens of billions of pounds into the economy through quantitative easing.
“In short, it did precisely the opposite of what it warned about before the referendum. It is hard to conclude that the same working assumptions shouldn’t apply this time around as well.”
Q: how likely is it that the @bankofengland actually raises rates if there’s a no deal recession— Ed Conway (@EdConwaySky) November 1, 2018
A: very very very very very very very very very very very very very very very very very very unlikely https://t.co/tzI3186xpm
Analysts are now expecting the next interest rate rise to be in May 2019; two months after the UK officially leaves the European Union which should give enough time to extrapolate economic data to make the best decision on a rate rise.
Bottom line from the #BoE - In an ideal world they'd be hiking rates, given the modestly upbeat set of growth & wage forecasts. But #Brexit uncertainty means that's not going to be realistic for quite some time. A rate rise before May 2019 still looks pretty unlikely— James Smith (@SmithEconomics) November 1, 2018
The Bank’s Brexit hesitance isn’t unwarranted either. UK manufacturing hit a 27-month low yesterday according to the latest market figures from IHS Markit, with the PMI (activity measure) down from 53.6 to 51.1 in October. Territory described as Growth is 50 points and above.
The UK manufacturing PMI now is consistent with a downturn in output. Manufacturers are reporting that overseas customers are holding back from placing orders due to no-deal Brexit concerns. With other surveys turning down in October too, it looks like we're heading for a poor Q4 pic.twitter.com/GViqrzo76P— Samuel Tombs (@samueltombs) November 1, 2018
It’s not all doom and gloom though. The Pound registered an impressive fightback yesterday after The Times reported that Prime Minister Theresa May and EU negotiators in Brussels had agreed a tentative deal on all aspects of Brexit, including continued access for to Europe for financial services based in Britain.
You can read the full Bank of England Quarterly Inflation Report by clicking the link below:
You can watch the full Bank of England MPC Press Conference in full by clicking the video below: