The Bank of England on Thursday held its benchmark interest rate steady at 0.75%, even as it downgraded its economic growth forecasts significantly.
Traders and analysts had been split on whether the Bank of England would cut interest rates, making Thursday’s vote one of the most eagerly awaited monetary policy decisions in years.
The pound spiked following the decision — Mark Carney’s last as Bank of England governor — and climbed by more than 0.4% against the dollar .
Seven of the bank’s nine-member monetary policy committee (MPC) voted to leave interest rates unchanged.
Two external members, Michael Saunders and Jonathan Haskel, voted for the third time in a row to lower rates.
The bank on Thursday downgraded its growth forecast for 2020, saying it expected GDP to rise by only 0.8%. It had previously predicted growth of 1.2%.
It also lowered its forecast for 2021 from 1.8% to 1.4%, and said that, on average, the UK economy would grow by only 1.1% over the next three years.
Many analysts had predicted that a run of weak economic data, including low inflation, weak retail sales, and a shrinking economy, could have prompted other members of the committee to join Saunders and Haskel.
Inflation in December came in lower than expected at 1.3%, hitting a new three-year low and coming in well below the Bank of England’s 2% target.
But others had pointed to signs that there has been a clear, if modest, rebound for the economy in the wake of December’s emphatic election result.
On Thursday, the bank seemed to agree, noting that global business confidence and manufacturing indicators had picked up.
“Domestically, near-term uncertainties facing businesses and households have receded. Surveys of business activity have picked up, quite markedly in some cases, and investment intentions appear to have recovered. Housing market indicators have strengthened and consumer confidence has increased slightly,” the bank said.
But the bank noted that its underlying assumptions hinged on the expectation that there would be “an immediate but orderly move to a deep free trade agreement with the EU on 1 January 2021.”
“There is mounting evidence that the UK economy may have experienced a bit of a post-election bounce, so on balance the bank made the right call to hold interest rates for now,” said Tej Parikh, the chief economist at the Institute of Directors.
Withholding a rate cut, Parikh said, gives the bank “greater wiggle-room” in the future if uncertainty eats into business activity.
The bank has long signalled that it expects to increase rates gradually, but in November it softened its language on the prospect of hikes, saying they “might” be necessary if global growth improved and Brexit uncertainty abated.
The MPC said on Thursday that if the economy recovers in line with its projections, a “modest” rise in interest rates may be needed to keep inflation in check.
It warned, however, that it may need to take action to reinforce the expected recovery if the “positive signals” from the economy are not sustained, or if inflation remains weak.
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