Bank of England set to hold interest rates amid EU uncertainty

Uncertainty over what negotiations will mean for the UK economy
Uncertainty over what negotiations will mean for the UK economy

The Bank of England is set to keep interest rates firmly on hold next week as policymakers remain in wait and see mode as Britain prepares for divorce with the EU.

The Government could trigger Article 50 as early as Tuesday, and economists believe the Bank’s Monetary Policy Committee (MPC) will unanimously vote to hold rates at 0.25% two days later in the face of potential economic upset from Brexit negotiations.

This is despite a growing number of rate-setters on the MPC being uncomfortable with soaring inflation.

Howard Archer at IHS Global Insight said: “We believe the Bank of England will remain pretty tolerant on the inflation overshoot given the prolonged, highly uncertain outlook that the UK economy is likely to face as the Government negotiates the exit from the EU.”

Given the woefully inaccurate forecasts ahead of the Brexit vote, there is little certainty of what the upcoming negotiations will mean for the UK economy.

Accompanying minutes from the Bank will be closely watched for its views on the path ahead for growth and the pound, but the Bank is set to want to keep a steady monetary path until the impact becomes clearer.

The decision also comes in the “immediate aftermath of significant global economic events”, according to experts at Investec.

The US Federal Reserve is likely to have raised its benchmark rate just the night before, while there is also a Congress vote on the government debt ceiling, as well as the Dutch general election.

Britain’s economy has so far confounded any expectations for a slowdown amid political turmoil, with the latest forecasts from the Office for Budget Responsibility (OBR) showing a sharp upward revision to its outlook for UK gross domestic product (GDP) this year from 1.4% to 2%.

But the fiscal watchdog painted a more gloomy long-term picture, downgrading next year’s growth from 1.7% to 1.6% and cutting forecasts for 2019 from 2.1% to 1.7%, before predicting 1.9% growth in 2020 and 2% in 2021.