The Bank of England said yesterday it was still likely to cut interest rates to just above zero later this year, even though the initial Brexit hit to Britain’s economy was proving less severe than it expected only last month.
The bank’s nine rate-setters voted unanimously to keep the bank rate at its new record low of 0.25 per cent, the lowest level in the BoE’s 322-year history.
They also voted 9-0 to keep the bank’s bond-buying programme target at £435 billion and to continue with its new plan to buy up to £10 billion worth of corporate bonds.
Last month, the bank decided to help the economy cope with the shock of the decision to leave the EU with a stimulus package on a scale not seen since the depths of the global financial crisis.
But since August, a string of indicators has shown a bounceback from the initial impact of the vote, leading some MPs to criticise BoE Governor Mark Carney for being alarmist about the risks of a Brexit vote.
The central bank said the economy was still on course to slow sharply.
“A number of indicators of near-term economic activity have been somewhat stronger than expected,” the bank said in minutes of the Monetary Policy Committee’s September meeting. “The Committee now expects less of a slowing in UK GDP growth in the second half of 2016.”
Central bank staff now estimate the economy will grow by 0.3 per cent in the July-September period, better than their previous forecast of a slow crawl of just 0.1 per cent made in August.
Data published earlier yesterday showed retail sales edged down only slightly in August after the strongest July in 14 years. Retailer John Lewis said the EU vote had had little impact but the full effect was not yet clear.
A Reuters poll of economists showed yesterday that Britain is likely to narrowly avoid a recession.
The bank said inflation would rise more slowly this year than it previously thought.
But overall economic growth of 0.3 per cent would represent a halving from the second quarter’s pace, and the bank reiterated it could cut its benchmark lending rate again soon if its longer-term view of the economy remained unchanged at its next meeting in November.
“The committee’s view of the contours of the economic outlook following the EU referendum had not changed,” the minutes said.
If the November forecasts were “broadly consistent” with August’s, “a majority of members expected to support a further cut in bank rate to its effective lower bound at one of the MPC’s forthcoming meetings during the course of the year,” they said, reiterating the MPC’s message in August.
Two rate-setters who last month opposed the expansion of the government bond-buying programme said they still did not think it was needed but voted in line with their colleagues because reversing the decision now would be too disruptive.
Under a new MPC calendar, the bank’s next rate decision is scheduled to take place on November 3. That is when economists expect it to cut borrowing costs to around 0.1 per cent.