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BoE maintains interest rates despite stagnating UK economy

The Bank of England maintained interest rates at 0.75% and left its future rate-setting policy open as the U.K. economy looks set to grind almost to a halt in the fourth quarter of 2019.

As in October, two of the nine members of the Bank's Monetary Policy Committee, or MPC, backed a rate cut, looking to support the slowing economy, but the remaining seven preferred to wait for clearer signals as Brexit unfolds and the U.S.-China trade talks progress.

SNL Image

The Bank of England has kept rates unchanged since a 0.25% increase in August 2018.

Source: AP Photo

Controlling inflation appears to be of little concern, with the bank expecting the headline inflation rate to fall to around 1.25% by spring as a result of declines in regulated energy and water prices. Inflation remains below the Bank's 2.0% target, with CPI inflation unchanged at 1.5% in November and core inflation stable at 1.7%.

Conflicting pressures on inflation, such as near-record employment and an appreciating currency, are expected to do little to move the needle.

Pound falls

Sterling appreciated by 2% since the November monetary policy meeting as currency markets interpreted a likely Boris Johnson victory in the Dec. 12 general election as positive for the outcome of Brexit. It gave up gains after today's decision to trade 0.3% lower at $1.3038.

Johnson's thumping election victory means it is now almost certain he will be able to pass his withdrawal agreement with the European Union by the end of the year. However, the pound has given back some of its gains following Johnson's comments that he will not allow negotiations over the future trading relationship with the EU to go beyond the stipulated 12-month period, creating a tight time frame to achieve a trade deal.

Economy stagnates

U.K. GDP is expected to rise "marginally" in the fourth quarter following growth of 0.3% in the third quarter, the bank said. As has been the case for 2019, business investment and exports have remained weak, with household consumption the only bright spot.

Year-over-year growth in October was the slowest since June 2012 as construction fell by 2%, while manufacturing and services output rose by just 0.2%. Bank staff predicts growth of just 0.1% in the fourth quarter of the year.

"If global growth fails to stabilize or if Brexit uncertainties remain entrenched, monetary policy may need to reinforce the expected recovery in U.K. GDP growth and inflation," the bank said in a statement accompanying the decision.

However, the Bank continues to suggest it will raise rates if the economic conditions improve.

"Provided these risks do not materialize and the economy recovers broadly in line with the MPC's latest projections, some modest tightening of policy, at a gradual pace and to a limited extent, may be needed to maintain inflation sustainably at the target," policymakers said.

The bank remains in "wait-and-see mode" and will remain so until there is a significant deterioration in the jobs market, James Smith, an economist at Dutch bank ING Group, wrote in a research note after the decision. "The risk is that the ongoing weakness in investment hits hiring demand further, and if it does, our view on the Bank of England could change."