Investments  

UK rates unlikely to rise in 'shadow of Brexit'

UK rates unlikely to rise in 'shadow of Brexit'

The Bank of England is unlikely to put interest rates up again this year despite better than expected economic data, according to Ben Brettell, senior economist at Hargreaves Lansdown.

Mr Brettell was commenting in the context of the Bank of England deciding to leave interest rates unchanged at 0.75 per cent this morning (13 September).

The nine members of the Monetary Policy Committee voted unanimously to keep the rate at its present level.

Mr Brettell said: "Markets gave a zero percent chance of any action from the BoE today, and so it came to pass, with a unanimous vote to leave rates untouched.

"There’s been little change in key economic indicators since the Bank’s August meeting, though there’s been a notable lengthening of the shadow cast by Brexit-related uncertainty in recent weeks.

"Policymakers are firmly in 'wait-and-see' mode having raised rates last month, and will be reluctant to even consider another move until they have a clear idea of what Brexit will look like. Realistically May next year looks the first available opportunity to raise rates to 1 per cent."

Earlier this week, data showed the UK economy expanded by 0.6 per cent in the three months to the end of July, while wage growth was revealed to be 2.9 per cent, comfortably ahead of the 2.4 per cent inflation rate.

Unemployment was confirmed at 4 per cent, based on metrics determined by the International Labour Organisation (ILO).

The gap between inflation and wage growth was 0.2 per cent when bonuses are considered. This part of the wage data, known as total real average pay, is lower today than before the financial crisis, because bonuses paid to financial services employees are lower, either because the bonuses themselves are lower, or because there are fewer people employed in the sector.

Data from the International Monetary Fund (IMF) shows the UK economy currently has a positive output gap. This means the economy is actually performing at above its long-term average growth potential.

It is in precisely those circumstances that central banks seek to raise interest rates, as they wish to stop debt bubbles developing in the economy. The bank is also mandated to achieve an inflation rate of 2 per cent.

Mike Bell, global market strategist at JP Morgan Asset Management said: "If the currency market is anything to go by, the markets are too pessimistic about the possibility of a no-deal Brexit.

"The significant economic damage that would be done by a no-deal Brexit to the UK and to a lesser extent the EU, combined with no support for such an outcome in either Europe or the House of Commons, makes this worst case scenario unlikely.

"If a no-deal Brexit is indeed avoided and wage pressures pick up then the BoE may feel the need to raise rates slightly faster next year than the market currently expects."

david.thorpe@ft.com