Interest rates on hold as economic indicators improve
Interest rates remained on hold in January, with some early signs that the UK and global economy could be picking up pace.
It was the final Monetary Policy Committee (MPC) meeting with Bank of England governor Mark Carney in his role.
MPC members voted 7 to 2 in favour of keeping interest rates on hold at 0.75%.
There was some speculation ahead of the meeting that interest rates could be cut this month, as a result of a slowing global economy. But, according to governor Mark Carney, “the most recent signs are that global growth has stabilised.”
Should this stabilisation of global economic growth fail to materialise, the Bank is ready to cut interest rates and stimulate the UK economy.
Speaking at a news conference after the MPC meeting, Carney explained that fewer companies are worried about the economic impact of Brexit.
He also referred to fresh economic data which suggested the UK economy will improve.
Despite these positive forecasts, Carney said:
To be clear these are still early days and it’s less of a case of so far so good than so far good enough.
Although the global economy looks to be recovering, caution is warranted. Evidence of a pick-up in growth is not yet widespread.
One risk factor for the global economy is the coronavirus outbreak in China, now declared by the World Health Organisation (WHO) as a global health emergency.
The WHO expressed its concerns about the virus spreading to countries outside of China, with weaker health systems.
Commenting on the Bank of England’s decision to hold interest rates at 0.75%, Melanie Baker, senior economist at Royal London Asset Management, said:
UK companies still face a significant amount of Brexit-related uncertainty which may weigh on confidence after the ‘Boris bounce’ and mean that the next policy change from the Bank of England is a cut, not a rate rise.
Conditions for a near-term rate cut are updated; a rate cut may be needed if better survey indicators are not followed through by better activity data.
Weak inflation seems to have increased as a concern, although their short term forecast indicates that they do not expect this to persist.
They moved some way from indicating multiple rate rises in the future, by dropping language referring to ‘limited and gradual’, to simply referring to “some modest tightening of policy” perhaps being needed (if the economy evolves broadly as expected).