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BoE maintains key rate at 0.75% as Brexit looms

The Bank of England's Monetary Policy Committee has voted unanimously to keep its key interest rate unchanged at 0.75% in its last rates decision before Brexit, still scheduled for March 29.

The Bank expects U.K. GDP to grow by 0.3% in the first quarter of 2019, marginally stronger than previously expected, despite a weakening in survey indicators of output since the start of the year.

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BoE Governor Mark Carney. Photo: AP

Supporters of a no-deal Brexit might draw comfort from a sharp increase in the number of U.K. businesses that have prepared for the country to quit the European Union without a withdrawal agreement. The BoE said the latest results from its survey of companies' preparations for a no-deal Brexit suggested that 80% of companies now judged themselves ready for a no-deal, no-transition Brexit compared with a figure of around 50% in the equivalent survey in January.

However, many of those companies also reported there were limits to the degree of readiness feasible in the face of a range of possible outcomes.

Outlook hinges on UK's exit

The BoE said the U.K.'s economic outlook continued to depend on the nature and timing of the country's withdrawal from the EU, and whether it is abrupt or smooth.

It said, again, that the MPC's response to Brexit will not be automatic and could result in interest rates moving in either direction. Economists and politicians have cast doubt on this in recent months with some suggesting a cut in interest rates is more likely.

The Bank said uncertainty over Brexit continued to generate volatility in asset prices, particularly the sterling exchange rate, while it also weighed on business investment. The Bank said sterling implied volatilities had fallen back a little further, and though there were suggestions that the market continued to view the risks to the exchange rate as skewed to the downside, this was less than before.

The MPC also voted unanimously to maintain the stock of sterling nonfinancial investment-grade bonds at £10 billion and to maintain the stock of U.K. government bonds at £435 billion.

Investment may be 6% to 14% lower

The BoE said business investment had now fallen in each of the past four quarters as uncertainties relating to Brexit had intensified. The Bank said research suggested that the level of nominal investment may be 6% to 14% lower than would have been the case without Brexit uncertainties.

There is further evidence, said the BoE, that companies have continued to build up their stock levels with the stock purchases index in the manufacturing PMI increasing sharply again in February.

Although inflation crept up in February to 1.9%, higher than the same month last year, it is still below the MPC's 2.0% target. The Bank is still in wait-and-see mode until the "fog" of Brexit clears, as the Bank's Governor Mark Carney has described it.

February's increase was the first rise in inflation since August 2018 when the Bank increased interest rates from 0.5%.

The MPC said that average weekly earnings, excluding bonuses, also increased 3.4% in the year to January. This figure was down 0.1% on the previous month, but wages continue to outpace inflation. The average weekly wage of £497 is still £9 lower than a decade ago, according to the Resolution Foundation.

The BoE said there had not appeared to be a strong link from wages to prices recently.

Meanwhile, employment is at its highest level since records began, with the number of people in work in the three months to January up by 220,000 to 32.71 million.