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Bank of England holds interest rates as Brexit extension remains uncertain

Alanna Petroff
Senior Economics Correspondent at Yahoo Finance UK
Bank of England governor Mark Carney has warned about the severe consequences of a no-deal Brexit. Photo: Dan Kitwood/Getty Images

The Bank of England (BoE) has decided to leave interest rates unchanged again as the fog of Brexit make it increasingly difficult to forecast how the UK economy will perform in both the short- and long-term.

The central bank announced on Thursday it was holding its benchmark interest rate at 0.75%, after hiking the key rate twice from an all-time low in 2017.

The BoE is keeping a wary eye on next week’s Brexit deadline and is watching as the UK government moves to secure a short extension to its divorce with the European Union.

A Brexit delay could significantly change the central bank’s interest rate plans and economic predictions.

The economic outlook will continue to depend significantly on the nature and timing of EU withdrawal,” the bank said.

Economists and businesses have warned that an extension could further damage business confidence and investment by prolonging uncertainty, and potentially alter consumer behaviour.

“The longer that Brexit uncertainty lasts, the longer it could weigh on the economy,” said Ruth Gregory, a senior UK economist at Capital Economics, in an interview last week with Yahoo Finance UK.

A Brexit extension is considered preferable to a no-deal Brexit. But it’s not solving anything.

“It’s a good thing. But it’s not the solution,” Stephanie Kelly, a senior political economist at Aberdeen Standard Investments Research Institute, told Yahoo Finance UK last week.

READ MORE: Here’s why a Brexit extension will still be painful for the UK economy

The BoE previously predicted that a no-deal Brexit could do more damage to Britain than the global financial crisis, with expectations that the UK economy would shrink by about 8% within a year and house prices would fall by about 30%.

It warned again on Thursday that if there’s a no-deal Brexit on 29 March – which remains the default scenario – it could not predict how it would react.

The monetary policy response to Brexit, whatever form it takes, will not be automatic and could be in either direction,” the bank said.

Currency focus

The BoE also noted on Thursday that uncertainty about Brexit timing was having a big influence on the UK pound.

Shifting expectations about the potential nature and timing of the United Kingdom’s withdrawal from the European Union have continued to generate volatility in UK asset prices, particularly the sterling exchange rate,” the bank said.

The UK pound (GBPUSD=X, GBPEUR=X) had been sliding in advance of the release of the rate decision, down about 0.6% to trade around $1.31. It was also down against the euro. Following the release, it rebounded a bit.

 

The BoE’s top priority is to keep the country’s inflation rate at 2% in an effort to ensure stable price expectations for consumers and businesses, which promotes a sound economy and properly functioning markets.

On Tuesday, the Office for National Statistics (ONS) reported that inflation ticked up slightly to 1.9%.

This is considered to be a comfortable level for the central bank.

READ MORE: UK pioneers new way to help warn about economic shocks


The pre-Brexit rush

The BoE has been rushing to arrange contingency plans for a no-deal Brexit to protect the country’s financial stability and financial services sector.

On Tuesday, it announced that its Prudential Regulation Authority and the Financial Conduct Authority had signed a preliminary agreement with the European Banking Authority to ensure continued supervisory cooperation and information-sharing in the event of a no-deal Brexit.

It’s also been arranging for the smooth operation of Britain’s clearing and derivatives businesses with other countries, including the US.