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Bank of England keeps rates on hold amid Brexit uncertainty

The Bank of England has kept interest rates unchanged at 0.75% after a unanimous decision by its monetary policy committee at its Sept. 18 meeting.

The central bank said Brexit-related developments are making U.K. economic data more volatile with GDP falling by 0.2% in the second quarter and now expected to rise by 0.2% in the third quarter. The sterling exchange rate index has risen by over 3.5% since the previous monetary policy committee, or MPC, meeting.

The longer uncertainty over Brexit persisted, particularly in a period of weaker global growth, the more likely it would be that demand growth would remain below potential, increasing excess supply and reducing inflationary pressure, the bank said in a statement accompanying the rates decision.

Repeating previous comments on the issue, the bank said that in the event of a no-deal Brexit, the exchange rate would probably fall, CPI inflation rise and GDP growth slow. The MPC would need to balance the upward pressure on inflation with the likely fall in sterling and any reduction in supply with the downward pressure from any reduction in demand.

"In this eventuality, the monetary policy response would not be automatic and could be in either direction," said the MPC.

In the event of a smooth Brexit and assuming some recovery in global growth, a significant margin of excess demand is likely to build in the medium term, it said. In that situation, gradual, limited increases in interest rates would be appropriate to return inflation to the 2% target, it said.

"Entrenched Brexit uncertainties" and slower global growth have led to a margin of excess supply, but increased uncertainty about Brexit meant the economy could follow a wide range of paths over coming years, it said.

The MPC said underlying growth had slowed but remains slightly positive with a degree of excess supply opening up within companies. The government’s plans for a significant increase in departmental spending for 2020-21 could raise GDP by around 0.4% over the MPC’s forecast period, it said.

It noted that CPI inflation slowed to 1.7% in August from 2.1% in July and is expected to remain below the bank’s 2% target in the near term. Unemployment has been under 4% since the beginning of the year while annual pay growth is at the highest rate in over a decade. However, employment growth appeared to be softening, it said.

The committee also voted unanimously to maintain the stock of sterling nonfinancial investment grade corporate bond purchases, financed by central bank reserves at £10 billion. It also voted unanimously to maintain the stock of U.K. government bond purchases, financed by central bank issues, at £435 billion.