Why did Bank of England hold interest rates?

What the move says for next year’s economic prospects

The Bank of England building on Threadneedle Street
(Image credit: Daniel Leal-Olivas/AFP/Getty Images)

The Bank of England has voted not to raise interest rates, just hours after the US Federal Reserve’s controversial decision sparked a global market sell-off.

Against a backdrop of weaker global growth, the Bank of England’s powerful nine-member Monetary Policy Committee (MPC) voted unanimously to keep interest rates at 0.75%.

“In the latest from the Bank of England's interest rate setters, it's not what they did that's eye-catching” says BBC economics correspondent Andy Verity, “it's what they said”.

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Cutting its growth forecast to 0.2% in the final quarter of 2019, the Bank warned a lack of clarity around Brexit, combined with a slowing global economy and weaker outlook for the eurozone is harming the UK economy.

“Further intensification of Brexit uncertainties, coupled with the slowing global economy, has also weighed on the near-term outlook for UK growth. Business investment has fallen for each of the past three quarters and is likely to remain weak in the near term. The housing market has remained subdued” the MPC said.

“The result is that all businesses currently have to pay more to borrow on international markets, but British companies have seen the biggest rise in costs” says the Daily Telegraph.

This means businesses are investing less, and will continue to do so for months.

Falling oil prices should ease pressures on the cost of living, bringing inflation down below the Bank’s 2% target in January.

“This also removes pressure to raise interest rates” says the Telegraph, though the MPC said more increases were likely over the coming years because low unemployment and rising wages are expected to push prices upwards.

Business Insider says “the timing of any rate hikes remains unclear particularly with the looming spectre of a possible no deal Brexit hanging over the UK”.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said he expects the MPC to raise rates by a quarter of a percentage point in May, after the UK formally leaves the EU.

“On balance, we continue to think that the MPC won’t wait for signs of a recovery to emerge in the data and will raise Bank Rate to 1.0% in May, once MPs have signed off a Brexit deal late in [the first quarter of 2019]” he said.

“But a longer delay certainly is possible, given the risk that the article 50 negotiating period might be extended, potentially keeping growth below-trend for longer, and the tail risk of a no-deal Brexit.”

The BoE decision came less than 24 hours after the US Federal Reserve announced it was pressing ahead with its own rate rise, despite pressure from Donald Trump and concerns over the US economy overheating.

That decision, and the Fed’s prediction of two more hikes in 2019, “sparked a wave of selling in the markets”, reports The Guardian.

Japan slumped into bear market territory, as shares dropped across Asia, while in Europe, the FTSE 100 crashed to a 27-month low at the open, with European stocks also hitting their lowest points since late 2016.

Most worryingly, Wall Street is on course for its worst December since the Great Depression after a fourth interest rate rise of 2018 at the US central bank stoked fears that its policymakers are pushing markets to breaking point.

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