Bank of England holds fire as Brexit uncertainty eases

LONDON — The Bank of England on Thursday opted against cutting interest rates amid signs of improvement in the British economy in the run-up to Britain’s imminent departure from the European Union.

The bank said in a statement that its Monetary Policy Committee voted 7-2 to keep the key U.K. interest rate unchanged at 0.75%. Though that’s the same composition as in the previous decision in December, the scale of the decision to hold came as somewhat of a surprise. Earlier this month, a run of rate-setters indicated that they may be in a position to reduce interest rates.

But the big win for Prime Minister Boris Johnson’s Conservative Party in December’s general election has eased some of the uncertainties that have been weighing on the British economy for the past few years. With a big majority in Parliament, Johnson has been able to push through his Brexit withdrawal bill, so Britain departs from the EU in an orderly fashion on Friday.

This clearer Brexit backdrop has seen an improvement in some of the survey data and that was enough for the majority of the bank’s rate-setting panel to hold their fire.

“So far, good enough,” Governor Mark Carney told a press briefing after the decision.

That stance helped support the pound, which in mid-afternoon London trading was 0.6% higher at $1.3093.

This meeting was Carney’s last at the helm. He leaves in March after seven years as governor, to be replaced by a former deputy, Andrew Bailey.

“I don’t have a regret,” he said when asked if he had any with regard to monetary policy moves during his tenure.

Whether interest rates move in the coming months – up or down – will hinge on whether the recent upturn in th e survey data translates into an improvement in the real economy.

“These are still early days,” Carney said.

Most economists think the economy will have done well to eke out growth any higher than 1% last year, which would be the lowest yearly rate since the country emerged from recession a decade ago. The bank isn’t expecting anything better over the coming two years, as it downgraded its growth forecasts for 2021 and 2022 to 0.8% and 1.4%, respectively — partly reflecting its view that Britain’s departure from the EU is economically damaging.

If there’s no sign of an imminent improvement, then interest rates could be cut soon, not least because inflation, at 1.3%, is running at its lowest annual rate since late 2016.

“Policy may need to reinforce the expected recovery in growth should the more positive signals from recent indicators of global and domestic activity not be sustained or should indicators of domestic prices remain relatively weak,” the committee said, according to the minutes of their meeting.

However, if the rebound materializes, then a hike could be in the making.

“If the economy recovers broadly in line with the MPC’s latest projections, some modest tightening of policy may be needed to maintain inflation sustainably at the target,” the minutes said.

The minutes showed that the majority of rate-setters said U.K. growth is projected to pick up a tad in 2020, supported by a more stable global economy, a further decline in Brexit uncertainties and expectations the British government will loosen the purse springs.

According to the minutes, the two rate-setters who backed a cut in the main rate to 0.5% — Jonathan Haskel and Michael Saunders — thought that with growth weak and inflation low, “the economy had a modest but rising margin of spare capacity.” They also noted that the improvement in survey data hasn’t provided a clear guide to real-world developments.

Brexit uncertainty has been largely to blame for Britain’s tepid growth in the years since the country voted to leave the EU in June 2016. Firms have been holding back investment amid fears that Britain would leave the EU without a divorce deal while consumers have become cautious. Some Brexit uncertainty remains as it’s still not clear what the economic relationship between Britain and the EU will look like beyond the end of this year.

After Britain officially leaves the EU on Friday, it goes into a so-called transition period through the end of the year — during which time it will remain part of the EU’s tariff-free single market and customs union. Johnson has said that he won’t request an extension to that transition period and that 11 months represents ample time to secure a comprehensive new trade deal between Britain and the EU for goods and services. Without a deal, it’s possible that tariffs and other restrictions will have been imposed on trade between the two by this time next year — a scenario that most economists think would sink the British economy into recession.

Carney said Brexit is one of the reasons why Britain faces a decade of “potentially profound structural change.”

In addition to negotiating a new trading relationship with the EU and carving out other ones around the world, Carney said the British economy will have to adapt to new immigration rules, big infrastructure projects as well as the transition to a low-carbon economy.

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Follow AP’s full coverage of Brexit and British politics at: https://www.apnews.com/Brexit

Pan Pylas, The Associated Press