Unchanged interest rates amid Brexit uncertainty, predicts EY

Unchanged interest rates amid Brexit uncertainty, predicts EY

Despite recent expectation that the Bank of England could either raise or even cut the UK interest rates, EY’s economic analysts have predicted the will likely remain the same.

Unchanged interest rates amid Brexit uncertainty, predicts EY

As recently as June, the focus on UK monetary policy has been when the Bank of England is most likely to raise interest rates.

A turnaround in sentiment, however, has led some to believe the Bank of England could be just as likely to cut them.

According to EY’s ITEM (Independent Treasury Economic Model) Club, it would be a surprise for the Monetary Policy Committee (MPC) meeting to result in anything other than a unanimous 9-0 vote in favour of keeping UK interest rates at 0.75%.

Howard Archer, chief economic advisor to the EY ITEM Club, said: “We expect the Bank of England to keep interest rates unchanged at 0.75% on Thursday following a unanimous 9-0 vote of the Monetary Policy Committee (MPC) at their August meeting. This would match the outcome of the MPC’s last meeting in mid-June.

“However, a fair amount has changed since the last MPC meeting in mid-June and this will lead to a lot of interest in the tone of the minutes of the August meeting as well as in the new growth and inflation forecasts contained in the simultaneously released Quarterly Inflation Report.”

The direction interest rates move hinges on Brexit developments. Should the UK leave the EU with a deal in place, the EY team expects that the current rate of 0.75% will remain the same well into 2020, and gradually rise in-line with a slowly growing economy.

The expectation is that the Bank of England will acknowledge the recent increased risk facing the UK economy due to uncertainty surrounding Brexit, but are unlikely to react by cutting interest rates unless there is a damaging ‘no-deal’ Brexit in October.

“Increased belief that the Bank of England’s next move will be to cut interest rates rather than increase them is the consequence of a number of factors,” said Archer. “These include the weakened performance of the UK economy in the second quarter, domestic political uncertainties, a slower and more uncertain global economic environment which is expected to see the Federal Reserve and ECB shortly cut interest rates, and Brexit uncertainty.”

“If the UK ultimately leaves the EU without a “deal”, the Bank of England has repeatedly held to the view that interest rates could move in either direction.”

The view mirrors Bank of England Governor Mark Carney’s comments saying that the prospect of a no-deal is slowing down economic growth, and that the BoE would likely be required to provide stimulus to the economy should a no-deal occur.

Speaking to MPs, Governor Cerny said: “It’s more likely we would provide some stimulus. We have said we would do what we could in the event of a no-deal scenario but there is no guarantee on that.”

“There is not a business investment boom going on in the country right now. I think we all know why that is not the case.”

The fear of further Brexit uncertainty is also reflected in economic predictions. The likelihood is that further delay in leaving the EU could also lead to a cut to interest rates, or at the very least a long delay before any hike.

Archer said: “If Brexit is delayed again – most likely until the end of March 2020 – we expect the Bank of England to hold off from hiking interest rates until further into next year as it gauges how the economy is performing after the UK’s exit from the EU.”

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