Bank of England forecasts low interest rates for longer2 min read

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Bank of England

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The Bank of England has signalled that prolonged Brexit uncertainty will keep interest rates lower for longer.

Policymakers said the UK would avoid falling into recession this year, but warned that Brexit and trade worries were weighing on the economy.

The Bank kept interest rates on hold at 0.75%.

The Monetary Policy Committee (MPC) that sets interest rates also warned that a no-deal Brexit would hit the economy.

Policymakers said it would lead to weaker growth, higher inflation and a further drop in the value of the pound.

However, the Bank stressed that interest rates could move up or down if the UK left the European Union without a deal.

The minutes of the Bank’s September meeting said that policymakers would have to balance raising interest rates to keep a lid on inflation against cutting them to support growth.

How does the Bank see the medium-term outlook?

The UK economy contracted by 0.2% in the three months to June. The Bank expects the economy to expand by 0.2% in the third quarter of this year.

While this is weaker than the 0.3% growth predicted last month, it means the UK is expected to avoid a technical recession, defined as two consecutive quarters of economic decline.

A survey by the Bank showed that consumer spending remained robust, with many families choosing to spend more time in the UK this summer rather than go abroad because of the weaker pound.

It said the increase in “staycations” had boosted spending on restaurants and hotel accommodation.

The Bank also said the government’s decision to inject more money into departments in the latest Spending Review would boost UK growth by around 0.4% over the next three years.

What about Brexit?

The MPC said that the ongoing uncertainty over the UK’s relationship with the EU risked a further period of “entrenched uncertainty”.

They said ongoing uncertainty would lead to weaker growth and less inflationary pressure, reducing the Bank’s need to raise interest rates.

The minutes of the meeting said: “The longer those uncertainties persisted, particularly in an environment of weaker global growth, the more likely it was that demand growth would remain below potential.”

However, policymakers repeated that more clarity that the economy was heading towards a Brexit deal meant that increases in interest rates would be needed over the next three years.

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