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UK News Desk

Interest rates set to remain at 0.75% as inflation stays low

Interest rates set to remain at 0.75% as inflation stays low and the economy stumbles amid the fog of Brexit

The Bank of England is set to keep interest rates at 0.75% as the economy stumbles amid Brexit uncertainties and inflation remains subdued.

The consumer prices index measure of inflation rose fractionally in February to 1.9 per cent, official data showed today, which is still below the 2 per cent target set for the Bank’s monetary policy committee.

That means there is little pressure on policymakers to raise rates at a time when the economy is struggling and the property market is stagnating.

The Bank of England is almost certain to keep the ban rate on hold when its monetary policy committee concludes its meeting tomorrow.

The Bank of England is almost certain to keep the ban rate on hold when its monetary policy committee concludes its meeting tomorrow.

Official data today showed house prices increased by 1.7 per cent in January – their slowest annual pace in nearly six years – as property values tumbled in London but increased elsewhere. 

There is still no clear sight of the Brexit outcome just over a week before the planned March 29 exit date, with reports claiming the EU will block an attempt by Theresa May to obtain a deferral until June 30.

Experts believe the Bank will remain firmly in wait-and-see mode for some time until – as Governor Mark Carney put it – the ‘fog’ of Brexit clears.

Annual average house price growth is trending rapidly towards zero.

Annual average house price growth is trending rapidly towards zero.

The average UK house price has taken a dip this month - but annual growth is still positive.

The average UK house price has taken a dip this month – but annual growth is still positive.

Better-than-expected employment and wages data this week bolstered the case for a rate rise later in the year. But the cost of living is stable, with the Office for National Statistics saying rising prices for food and alcohol were offset by weaker growth in clothing and footwear in February.

Rates generally only go up when inflation looks set to exceed the 2 per cent target – and even then a weak real economy can sway the Bank from a hike.

Economic growth is set to remain weak in the first quarter of 2019, so there is little chance the Bank will look to make any moves until some of the damaging uncertainty over Brexit is lifted.

Howard Archer, chief economic adviser to the EY Item Club, said: ‘Despite robust employment growth and firm pay, there looks to be zero prospect that the Bank of England is going to act on interest rates until the Brexit situation is resolved and it can see how the economy is being affected.

It is property buyers and sellers in London that have been most spooked by Brexit.

It is property buyers and sellers in London that have been most spooked by Brexit.

Mortgage rates have dropped considerably during the era of rock-bottom base rates.

Mortgage rates have dropped considerably during the era of rock-bottom base rates.

‘With Brexit now looking most likely to be delayed until at least 30 June – and very possibly significantly later still – and the economy looking soft overall in the first quarter, we believe that it is ever more likely that the Bank of England will sit tight on interest rates through 2019 – assuming that the UK ultimately leaves the EU with a ‘deal’.’

The Government’s official forecaster and fiscal watchdog, the Office for Budget Responsibility, last week revised its outlook for interest rates – lowering where it expects them to be in four years’ time to not far above 1 per cent.

The rates outlook would alter dramatically should there be a no-deal scenario, with most economists expecting a cut despite the Bank’s repeated warnings that policy could move in ‘either direction’.

The Government's official forecaster and fiscal watchdog, the Office for Budget Responsibility, last week revised its outlook for interest rates.

The Government’s official forecaster and fiscal watchdog, the Office for Budget Responsibility, last week revised its outlook for interest rates.

Recent data has pointed to economic growth stalling at 0.2 per cent in the first quarter, unchanged on the previous three months as Brexit uncertainty has seen sharp falls in business investment.

The recent official data revealed a 0.5 per cent month-on-month rise in January in a rebound after a 0.4 per cent fall in December, but growth edged just 0.2 per cent higher overall in the three months to January.

Mark Carney has warned that uncertainty will remain for some time yet even if an agreement is secured.

Mark Carney has warned that uncertainty will remain for some time yet even if an agreement is secured.

Closely-watched purchasing managers’ index surveys have also signalled growth easing back to just 0.1 per cent between January and March, while the latest manufacturing poll from the CBI on Wednesday showed the weakest activity since last May.

It also showed that a quarter of manufacturers were actively stock-building in preparation for a possible no-deal.

The Bank and independent forecasters at the Office for Budget Responsibility have both downgraded the growth outlook to the weakest for a decade in 2019, at 1.2 per cent this year.

There is some hope of a marginal bounce-back should a Brexit deal be struck and business investment recovers, but Mr Carney and many other economists have been quick to warn that uncertainty will remain for some time yet even if an agreement is secured.

James Knightley, an economist at ING, is less gloomy on the prospects.

He said the better-than-expected 222,000 rise in employment in the recent data, the 3.4 per cent rise in wage growth, and the fact that the UK’s jobless rate has fallen below 4 per cent for the first time since 1975 cannot be ignored.

He said: ‘The UK labour data looks astonishingly strong for an economy that is supposedly slowing on most other measures.

‘If the Government gets a long Brexit extension, a Bank of England rate hike is clearly on the table for the summer.’

 

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Markets | Mail Online

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