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Financial News: Bank Of England Holds Rate, Cuts Growth Outlook

Bank Of England Holds Rate, Cuts Growth Outlook

01/30/2020 - 09:03:00 (RTTNews)

(RTTNews) - The Bank of England kept its interest rate and quantitative easing unchanged on Thursday, as clarity over Brexit and government spending measures underpin near-term growth.

At the final meeting of Mark Carney as BoE Governor, the monetary policy committee decided to maintain the interest rate at 0.75 percent in a split vote of 7-2.

Jonathan Haskel and Michael Saunders repeated their call for a quarter-point reduction for the third straight meeting, the minutes showed.

The rate-setting body unanimously decided to retain the quantitative easing at GBP 435 billion.

The next rate setting meeting will be headed by Andrew Bailey after Carney steps down on March 15.

The MPC judged that the existing stance of monetary policy is appropriate. The bank dropped the guidance for a limited and gradual tightening of policy and said "some modest tightening" may be needed.

However, the bank downgraded its growth projections despite early signs of growth picking up.

Economic growth remained moderate in 2019 and is estimated to have been around zero in the fourth quarter. Growth slowed largely due to Brexit uncertainties, the BoE said. If growth stays weak, then the central bank may need to lower interest rates to support the UK economy and ensure that inflation return to the target sustainably, the monetary policy report said. Carney said activity has picked up sharply since election, but it is early days, less a case of 'so far, so good'. But actually "so far, good enough," he added.

The bank staff expects GDP to grow 0.2 percent in the first quarter of this year.

The BoE downgraded its growth outlook for 2020 to 0.8 percent from 1.2 percent. Likewise, the projection for 2021 was lowered to 1.4 percent from 1.8 percent and the outlook for 2022 to 1.7 percent from 2 percent.

The projections are based on the assumption of an immediate but orderly move to a deep free trade agreement between the UK and the EU.

Inflation is projected to remain below the 2 percent target throughout this year. It is then expected to rise towards the target over 2021 and reach 2 percent in the first quarter of 2022.

Early this month, markets were expecting a rate cut as policymakers favored loosening to underpin growth. However, economic reports and surveys showed improvement in labor markets and activity since the election victory of Boris Johnson.

A multitude of Brexit-related unknowns means a rate cut further down the line can't be totally ruled out, but for now rates are likely to remain on hold for the rest of 2020, James Smith, an ING economist, said.

The UK will eventually leave the European Union at 11 pm on January 31, Friday, ending 47 years of membership, and enter a transition period that gives time until December 31, 2020 to negotiate a new relationship.

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