21 March 2019

Financial Times: Bank of England holds interest rates as Brexit clouds outlook

The Bank of England remained in “wait and see” mode at its March interest rates meeting, indicating that uncertainties over Brexit were too great to provide a clear guide to the forces shaping the economy.

The bank’s Monetary Policy Committee voted unanimously to keep interest rates at 0.75 per cent on Thursday, and said that while most companies thought they were ready for a no-deal Brexit, they were still left at the mercy of events beyond their control.

The nine committee members said that corporate investment appeared to be reduced because of the UK’s political turmoil and was now between 6 and 14 per cent lower than it would have been without the uncertainties generated by Brexit.

The BoE’s decision to leave monetary policy unchanged was widely expected but recent strong data in the labour market, retail sales and the public finances have led some economists to predict a rate rise soon after Brexit uncertainties are resolved.

The MPC poured some cold water on these expectations, saying that it judged the data to be “mixed” and in line with its February forecasts, which implied there was little urgency for interest rate increases.

The committee also said that with evidence of companies and households stockpiling for a chaotic Brexit, “short-term economic data may provide less of a signal than usual about the medium-term growth outlook”.

To better understand what companies are doing as the March 29 Brexit deadline approaches, the MPC commissioned a survey from the central bank’s regional agents. It found that 80 per cent of the companies approached “judged themselves ready for a no-deal, no-transition Brexit scenario”. This was up from 50 per cent when the BoE last asked the same question in January.

The same companies noted that their preparations related only to matters they could manage themselves. They said that tariffs, border frictions, exchange rate movements and recognition of certifications “were outside their control” and predicted “significantly weaker” activity if there was a no-deal Brexit.

Companies also reported weak investment intentions under any Brexit scenario, even though the regional agents found the companies they surveyed were having the worst recruitment difficulties of any period since the MPC surveys began in 2006. [...]

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