RBI To Cut Rates Again Before Elections, But No More

Andrew Cummings
February 9, 2019

The Bank said that endless uncertainty over the Brexit negotiations meant companies were hunkering down and cutting investment.

That's down sharply from the 1.7 per cent predicted in November and below 2018's 1.4 per cent.

The Bank slashed this year's growth forecast to 1.2 per cent - the lowest since 2009, when the economy contracted by 4.2 per cent at the height of the recession following the financial crisis.

Uncertainty surrounding Brexit pushed the Bank of England to lower its economic growth forecast for the United Kingdom in 2019 to just 1.2%, which would mark the country's slowest growth since the financial crisis.

Bank governor Mark Carney says: "The fog of Brexit is causing short term volatility in the economic data, and more fundamentally, it is creating a series of tensions in the economy, tensions for business".

The Bank of England held the monetary policy unchanged in line with the expectations while raising the warning about Brexit uncertainty negative effects, but Governor Carney opted for a calm tone that finally supported Sterling.

Rates are likely to increase further in the coming years, but the timing of any rate hikes remains unclear, particularly with the looming spectre of a possible no deal Brexit hanging over the UK.

In the United States, the Federal Reserve last month left its key lending rate unchanged and said it would be patient about making any further changes, in a clear signal that the central bank has heeded concerns about the economy.

It was possible that Brexit might not be fully "tied up in a nice package" by the end of March, Carney said, but he added that there was also upside for Britain's economy if London and Brussels sign off on a deal.

He stressed this was not the Bank's central forecast for growth.

The pound initially tumbled after the report, but later recovered to stand 0.4% higher at 1.298 U.S. dollars and 0.4% up at 1.14 euros.

This is being driven by sharp falls in business investment, as well as a drop in consumer spending and signs of a weaker United Kingdom housing market.

It's unclear she will be able to get any concessions and fears have grown in recent weeks that Britain could crash out of the European Union without a deal, a worst-case scenario that the Bank of England has previously said could see the British economy shrink by 8 per cent within months and house prices collapse by around a third.

The cut in borrowing costs in Asia's third-biggest economy comes as the economy stutters and other central banks, most notably the Federal Reserve, have sounded increasingly cautious about the global outlook.

Mr Carney said a rapid easing of uncertainty could potentially boost growth by around 0.5 percentage points a year over the next three years.

Economist James Smith at ING said: "The Bank is highly unlikely to tighten policy again through the first half of this year, and indeed the chances of a rate hike at all in 2019 have receded - although we think it's too early to write one off completely".

The BoE sent a reminder to investors that rates might rise more quickly than they expect by saying it saw inflation in two years' time at 2.1 percent, a touch above its 2 percent target.

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