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Bank Of England Keeps Rate On Hold, Sees Economy Stagnating In Q2

bankofengland jun20 lt

The Bank of England maintained its interest rate and quantitative easing on Thursday, but downgraded its near-term growth projection as downside risks increased amid trade disputes and no-deal Brexit fears.

The nine-member Monetary Policy Committee, led by Governor Mark Carney, unanimously decided to hold the bank rate at 0.75 percent.

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 stock of corporate bond purchases was kept at GBP 10 billion and that of government bond purchases at GBP 435 billion.

The bank downgraded its growth outlook for the second quarter to zero from 0.2 percent saying that the impact of factors which underpinned first quarter growth, namely stock-building ahead of the original Brexit deadline, faded.

Moreover, the bank observed that car manufacturers' Brexit contingency plans was likely to push down the second quarter growth, but push up third quarter expansion.

Underlying growth appeared to have weakened to a little below the potential, the bank said.

Globally, trade tensions have intensified, while domestically the perceived likelihood of a no-deal Brexit has risen, the bank observed. UK's economic outlook depends significantly on the nature and timing of EU withdrawal.

The central bank reiterated that the monetary policy response to Brexit will not be automatic and could be in either direction. In this process, the bank will act to achieve the inflation target.

In May, inflation eased to the central bank target of 2 percent. The bank forecast inflation to fall below the target this year.

The Bank of England has signaled an interest rate hike in case of a smooth Brexit, but policymakers are once again concerned that the UK may eventually leave the EU without a deal.

Meanwhile, central banks across the world has embarked on an easing trend as the global economy slows due to trade tensions and other geopolitical concerns.

The U.S. Federal Reserve hinted at cutting rates on Wednesday and the European Central Bank last week suggested more stimulus.

Even if there is a smooth Brexit and inflation bobbing around the target, the BoE is unlikely to feel under much pressure to rush ahead with rate hikes, Thomas Pugh, an economist at Capital Economics, said.

If there is a no deal, then the MPC will probably quickly change its tune and support the economy by cutting interest rates, the economist noted.

As policymakers are flagging that the perceived risk of a 'no deal' Brexit is rising, interest rates are unlikely to rise this year, despite recent signals that markets may be underestimating future tightening, ING economist James Smith said.

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