Bank of England holds interest rate but slashes forecast
The Bank of England (BOE) kept interest rates steady at 0.75%, citing signs that Britain's economy had picked up since December's election.
But the central bank dealt a blow to Boris Johnson's government by further downgrading its view of the underlying prospects for the economy to their lowest level since the second world war.
The UK's output is now expected to rise only by only 0.8% this year compared with the prediction of 1.2% the Bank made in November.
The Bank of England is waiting for the Budget in March"
GDP growth next year has also been revised downwards to 1.4% from 1.8%, while in 2022 growth of only 1.7% is expected, compared with 2% previously.
The verdict has potential to embarrass the chancellor, Sajid Javid, who earlier this month told the Financial Times he would target economic growth of between 2.7-2.8%.
"Productivity growth might pick up a little from current rates, but was expected to remain subdued. That reflected how persistently weak productivity growth had been since the financial crisis, the consequences of the recent weakness in investment and the adjustments necessitated by Brexit," the Bank added.
Financial markets had seen a 50% chance of a cut, but the monetary policy committee (MPC) split once again 7-2 in favour of keeping the bank rate at 0.75% with external members Michael Saunders and Jonathan Haskel voting to lower rates.
This was Mark Carney's final rate-setting meeting before he stands down from Threadneedle Street in March. Carney will be replaced as governor by the head of the Financial Conduct Authority, Andrew Bailey.
Industry reactions
Robert Alster, head of Investment Services at Close Brothers Asset Management said: "The economy towards the end of 2019 looked weak enough to make an interest rate cut look necessary, but early indicators in 2020 have allowed the MPC to demur. Business confidence is up in light of the decisive election result in December, and consumer sentiment shows signs of recovery.
"The March Budget will be key. We'll likely see promises of impressive fiscal stimulus, and the Bank will have a close eye on the data to see how businesses act in anticipation of life after the transition period."
Nigel Green, founder and CEO of deVere Group, said: "As the market had widely expected, the Bank of England voted to maintain the interest rate at 0.75%.
"The decision was made, we can assume, because the underlying economic data is ambiguous rather than compelling, and we have yet to see how much fiscal expansion the government is set to do. The announcement has caused the pound to strengthen and FTSE 100, the UK's leading stock index, to take a mild hit because of the translation effect of a stronger sterling on overseas earnings.
"However, within 24 hours of the Bank of England's announcement, any market impact will likely be forgotten. As such, investors should sit tight."
He continues: "The Bank of England is waiting for the Budget in March. The Chancellor Sajid Javid is promising an ‘infrastructure revolution' - which will take years to heat up the economy as spending on that is slow to come through. But there could be more immediate fiscal sweeties, leading to inflation fears, such as tax cuts and increased current spending on public services, including health, defence and police.
"An expansionary fiscal policy carries with it greater uncertainty over inflation and growth. The BoE will want to keep their powder dry to address this."
Green goes on to add: "For investors, and particularly those interested in sterling, it will be the Bank of England's response to a potentially expansionary fiscal policy that is the story of 2020. And for this, they have to sit tight until March."
CJ Cowan, assistant portfolio manager at Quilter Investors noted: "Speculation of an impending downward adjustment in rates gathered steam in the first few weeks of the year following comments from two Monetary Policy Committee members that they would consider voting for a cut if economic data did not improve. Coupled with two members already voting for a cut since November, this made the committee voting maths look particularly tight, although this ended up not being the case.
"Interest rate markets rapidly moved to price a 70% chance of immediate action from the BoE, although this was dialled back to around 50% going into today's meeting. Indeed the UK's economic fortunes weakened during 2019 and hard economic data reported throughout January was poor. Notably, inflation was softer than expected and considerably below the BoE's 2% target while monthly GDP in November also signalled contraction of the economy.
"Recent survey data showed some degree of a post-election rebound so a majority of economists thought the MPC would hold on and see if this sentiment boost would be sustained and feed through into the hard data.
"They were proven right in Mark Carney's final MPC meeting as Governor, although this piles some pressure onto incoming Governor Andrew Bailey, who may be compelled to cut at one of his first few meetings.
"With an economy growing below potential and inflation well below target it is likely just a matter of time before the Bank reduces rates as the tentative bounce in sentiment may prove to be temporary given the uncertainty that still remains around the UK's future relationship with the EU and its other trading partners."
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