The Bank of England has left interest rates on hold, surprising precisely no-one. A fragile UK economy, softening global demand, and the looming shadow of Brexit leaves little scope for the central bank to do anything more than sit on its hands for the time being. Contributor Laith Khalaf, Senior Analyst – Hargreaves Lansdown.
Markets are now pricing in a rate rise in the middle of next year, though between now and then we should get greater clarity on the size and shape of Brexit, which makes monetary policy in the next twelve months unpredictable.
It’s worthy of note that the Bank of England says its response to Brexit could be to shift policy in either direction. So it could cut rates if it sees a disorderly Brexit damaging economic growth, though it might be forced to hike rates if there’s a run on the pound.
Alternatively a cosy agreement on the UK’s withdrawal from the EU could see rates move higher as we would be rid of a key source of macro-economic uncertainty. The range of possible permutations serves as a reminder of the difficulty of predicting the financial effects of something as dynamic and complex as Brexit. Even if you guess the right political outcome, asset prices may not move in the way you expect.
In the longer term, economic projections from both the Bank of England and the OBR paint a pretty dreary picture of the UK’s prospects. Growth is expected to be present, but muted, and that suggests low interest rates for the foreseeable future.
In the US, the economy has performed so well that interest rates are now above 2 percent and are heading towards more normal levels for the first time since the financial crisis. These sunny uplands look a long way off for the UK economy.’
