Skip to main content

The Bank of England lowered its growth forecasts on Thursday due to increased Brexit worries and a slowing global economy, but stopped short of following other central banks and considering an interest-rate cut.

A day after the U.S. Federal Reserve reduced rates for the first time since the global financial crisis, the BoE said it still expected to raise borrowing costs gradually – though this now hinged on a global pickup as well as a “smooth” Brexit.

“Profound uncertainties over the future of the global trading system and the form that Brexit will take are weighing on U.K. economic performance,” BoE Governor Mark Carney said.

Story continues below advertisement

BoE forecasts showed a one-in-three chance that the economy would be shrinking in annual terms by the end of the first quarter of 2020, even without a disruptive Brexit.

Sterling sank to a fresh low below $1.21 while benchmark 10-year gilt yields fell to their lowest since the BoE launched its most recent round of asset purchases in August 2016, shortly after the Brexit referendum.

“The U.K. might need to see a pickup in the global environment – as well as increased clarity on Brexit – for the market to return to expecting rate rises,” HSBC economist Elizabeth Martins said.

The BoE’s Monetary Policy Committee (MPC) voted 9-0 to keep rates unchanged at 0.75 per cent, as expected in a Reuters poll of economists, and said it would not automatically cut rates even if Britain left the European Union without a deal.

New Prime Minister Boris Johnson says he will take Britain out of the EU on Oct. 31 – regardless of whether he gets a transition deal to keep trade running smoothly – prompting markets to price in higher risks of a disorderly Brexit.

The BoE said business uncertainty about Brexit had become “more entrenched” and Carney said the economy would face an “instantaneous shock” after a no-deal Brexit, with sterling and growth both likely to weaken further.

But the BoE’s ability to cushion the blow would be limited by the risk that lower rates might boost inflation by increasing demand for imports that could no longer be readily obtained.

Story continues below advertisement

GROWTH DOWNGRADE

The BoE’s main forecasts, which assume Britain avoids a Brexit shock, now foresee economic growth of 1.3 per cent for 2019 and 2020, down from 1.5 per cent and 1.6 per cent in its previous forecasts in May.

That would leave Britain roughly in line with the euro zone, which Britain regularly outperformed before its decision to leave the EU.

Before Thursday, some analysts had said the BoE might adjust its long-standing message that it expected to raise rates in a limited and gradual way because of the no-deal Brexit risks.

Carney said a smooth Brexit outcome had become a “less dominant” scenario but the BoE’s guidance remained valuable for steering market expectations for monetary policy.

“Quite frankly, markets know where it’s going and if you strip out their no-deal probability weighting, it’s basically where they expect it too,” he said.

The weaker growth outlook comes despite the expectations in markets of a rate cut that the BoE slots into its forecasts.

Story continues below advertisement

After Thursday’s decision, markets continued to price in a near 90 per cent chance that the BoE will cut rates by 25 basis points before Carney steps down on Jan. 31, largely because of the risk of Britain leaving the EU with no transition.

Economists polled by Reuters on average see a one-in-three chance of a no-deal Brexit.

The BoE now expects inflation – currently on target at 2 per cent – to be higher in two and three years’ time, and by more than it predicted in May.

Growth and inflation would both probably be slower in the case of a smooth Brexit than its forecasts suggest, due to a likely snapback in sterling and in market interest rate expectations, the BoE said.

Therefore, inflation in three years’ time would not necessarily exceed the BoE’s target but the BoE still foresaw the domestic economy overheating, requiring higher rates.

Report an error
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

Comments that violate our community guidelines will be removed.

Read our community guidelines here

Discussion loading ...

Cannabis pro newsletter
To view this site properly, enable cookies in your browser. Read our privacy policy to learn more.
How to enable cookies