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Financial News: Bank Of England Cuts Growth Outlook

Bank Of England Cuts Growth Outlook

08/01/2019 - 08:43:00 (RTTNews)

(RTTNews) - The Bank of England downgraded its growth projections on Thursday and warned that there is one-in-three chance of a UK recession, citing intensifying Brexit-related uncertainties and weaker global growth and trade disputes.

Policymakers unanimously decided to hold the bank rate at 0.75 percent, as widely expected.

The previous change in the bank rate was a quarter-point hike in August 2018 and the rate is now at its highest level since 2009.

The Monetary Policy Committee, led by Governor Mark Carney voted 9-0 to hold the stock of corporate bond purchases at GBP 10 billion and that of government bond purchases at GBP 435 billion.

The decision came a day after the U.S. Federal Reserve lowered its interest rate by a quarter point.

The European Central Bank is widely expected to cut its deposit rate further into negative territory and add monetary stimulus in September, to support a slowing euro area economy.

Assuming a smooth Brexit, the BoE repeated that the interest rate will be hiked at a gradual pace and to a limited extent.

However, the bank noted that the Brexit uncertainty has become more entrenched, citing evidence from companies.

"In the event of a no-deal Brexit, the sterling exchange rate would probably fall, CPI inflation rise and GDP growth slow," the bank said in its minutes.

If there is a Brexit deal, the MPC is now eyeing up raising interest rates to around 1.0 percent over the next couple of years rather than 1.25 percent previously, Paul Dales, an economist at Capital Economics, said.

If there is a no deal Brexit, the Bank would join the Fed and cut interest rates to at least 0.25 percent, the economist noted.

Increased uncertainty about the nature of Brexit means that the economy could follow a wide range of paths over coming years, the BoE noted.

"The appropriate path of monetary policy will depend on the balance of the effects of Brexit on demand, supply and the exchange rate," the bank said.

The BoE reiterated that the response to Brexit, whatever form it takes, will not be automatic and could be in either direction.

According to the Inflation Report, growth is expected to remain subdued in coming quarters, as uncertainties have intensified over the past few months.

The MPC's forecast is based on the assumption of a smooth Brexit. This is the final Inflation Report before the new October 31 Brexit deadline.

GDP is expected to have been flat in the second quarter of 2019, the bank said, as it lowered growth projections for both 2019 and 2020 to 1.3 percent. The outlook for 2019 was trimmed from 1.5 percent and that for 2020 from 1.6 percent.

Inflation is forecast to fall temporarily below the target over the next six months as energy prices decline. Inflation picks up to materially above the 2 percent by the end of the forecast period, the bank said.

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