BOE hike plans dogged by slow growth, Brexit

8 February, 2019 12:00 AM printer

LONDON: The Bank of England's (BOE) plans for interest-rate increases - already at the mercy of Brexit - are being further disrupted by a slowing economy.

Officials are likely to vote unanimously to hold the benchmark at 0.75 per cent when they announce their decision at noon in London on Thursday. That means much of the focus will be on governor Mark Carney's press conference and the bank's latest forecasts, even if the latter may become obsolete by the end of March, report agencies.

With 50 days to go before Britain is due to leave the European Union, Prime Minister Theresa May has yet to get her exit plan through Parliament, meaning no one knows how Brexit will end. With the outlook so clouded, policymakers have been boxed in by uncertainty, making it more difficult for them to build on the two hikes they have delivered since late 2017.

Officials are also due to publish their annual review of the supply side of the economy, which last year saw them cut their prediction for the UK's potential growth to 1.5 per cent. While they have stayed largely silent on policy amid the recent political turmoil, they have stuck to the line that limited and gradual hikes are probably needed to keep inflation in check.

Even that argument has lost some ground since the turn of the year, as price growth slows towards their target quicker than they anticipated, and a steady drumbeat of surveys suggest consumers and the housing market are coming under increasing pressure. The global outlook has also worsened, and the US Federal Reserve has already shifted to a pause its more advanced tightening cycle.

The starkest warning on the health of the economy came this week, when a report showed growth in the dominant services sector came close to a standstill in January as firms became increasingly anxious about Brexit. Taken with similarly disappointing reports for manufacturing and construction, it suggests the economy is at risk of stagnating - or worse - in the first quarter, according to IHS Markit, which compiles the data.

The arguments for a rate hike may be further undermined by a drop in inflation, which is returning to the 2 per cent target at a faster pace than officials predicted in November. The central bank will publish new forecasts for growth and inflation today, although those may be undermined because they are based on a relatively smooth Brexit - a conclusion that seems increasingly unlikely.