Bank of England slashes 2019 growth forecast to just 1.2% as it holds rates on at 0.75% amid economic stagnation
The Bank of England has slashed its growth forecast for this year from 1.7 per cent to just 1.2 per cent as its policymakers held interest rates at 0.75 per cent today.
With Brexit uncertainty wreaking havoc on the economy, that will be the lowest annual rate of growth since 2009, when the UK was still in recession in the wake of the financial crisis.
The monetary policy committee voted unanimously to keep rates unchanged. Experts said rate-setters are likely to hold off from raising rates for some time until Brexit clarity emerges.
Sterling weakened on the news and was trading 0.6 per cent down versus the US dollar at 1.285, while against the euro the pound was down 0.3 per cent at 1.134.
The Bank and Governor Mark Carney have ramped up their warnings over the worsening outlook for the global economy, and China in particular.
The Bank’s quarterly inflation report also signalled rates may not rise until the second half of 2020 as Brexit worries have seen businesses freeze spending, while it warned consumer confidence had ‘weakened significantly’. Its growth forecast for 2020 was also cut to 1.5 per cent.
In minutes of the latest rates decision, the Bank said: ‘Since the Committee’s previous meeting, key parts of the EU withdrawal process had remained unresolved and uncertainty had intensified.
‘Businesses had appeared increasingly to be responding to Brexit-related uncertainties and there were signs that those uncertainties might also be affecting household spending and saving decisions.’
The Bank’s latest rates decision comes just days after industry data showed output in Britain’s dominant service sector almost ground to a halt in January, reaching its lowest level for two-and-a-half years.
Economists said the figures suggested growth may flatline in the first quarter of 2019, following disappointing purchasing managers’ index readings for the manufacturing and construction sectors in January.
The uncertainty caused by Brexit appears to be weighing not just on businesses, but also consumers as retail and house purchases appear to be affected.
Retail sales fell 0.9 per cent in December after Black Friday brought spending forward to November, while there are also signs of sales stagnating in January.
Financial markets have cut nearly one full quarter point rate rise over the next two years since the last inflation report in November, factoring in just a 50/50 chance of one hike in 2019.
The pressure to raise rates has also eased as recent official figures showed inflation falling further in December, to 2.1 per cent from 2.3 per cent in November.
The Bank said growth was likely to have halved to 0.3 per cent in the fourth quarter of 2018, down from 0.6 per cent in the previous three months and estimated it will fall again to 0.2 per cent in the first quarter of 2019.
This is being driven by sharp falls in business investment, as well as a drop in consumer spending and signs of a weaker UK housing market. A sharper-than-expected slowdown in the global economy is also impacting UK growth, according to the Bank.
But it said the growth hit was expected to be short-lived, with a recovery in expansion later in 2019 – though this is based on a Brexit deal being reached by March 29. It forecasts output expanding by a healthier 1.9% in 2021.
‘A period of softer growth domestically and in the rest of the world was likely to be prove only temporary,’ the Bank said.
In the inflation report, the Bank outlined the volatility of its forecasts depending on Brexit fears, estimating growth could be 1.5 per cent higher over the next three years – at a potential 1.6 per cent in 2019 – if a favourable deal is reached and uncertainty disappears.
The Bank said on the flip side, growth could slump to a potential 0.8 per cent in 2019 should uncertainty persist and financial conditions tighten.