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After vote by MPC on rates...

Carney warns of ‘uncomfortably high’ risk of no Brexit deal

Bank of England

Rate setters were surprisingly unanimous (pic: Terry Murden)


 

Sterling fell after Bank of England Governor Mark Carney warned of an “uncomfortably high” risk that Britain leaves the European Union with no deal.

In a radio interview following the decision to raise interest rates, he said: “The possibility of a no deal is uncomfortably high at this point.”

Sterling fell to an 11-day low against the dollar on his comments which came after the interest rate was raised to 0.75% as expected, the first time it has been above 0.5% since March 2009.

Members of the Monetary Policy Committee were surprisingly unanimous when most analysts had expected a 7-2 split.

The Bank said Britain’s economy was growing more slowly than in the past ahead of Brexit, but was operating at almost full capacity which may induce inflationary pressure.

Event so, the Bank signalled no rush to raise rates beyond gradual and limited increases as inflation remained at or just above the 2% target over the next few years.

It expects Britain’s economy to grow by 1.4% this year, unchanged from its forecast in May, but it raised its forecast for growth in 2019 to 1.8% from a previous projection of 1.7%.

Wages were likely to be growing by an annual 2.5% at the end of this year, before picking up to 3.25% in 2019, unchanged from before.

Guy Foster, Brewin Dolphin’s head of research, said: “The MPC took the opportunity to raise interest rates despite an easing inflationary outlook. This is a sensible precaution because they probably won’t want to do so in the heat of Brexit negotiations and there’s certainly a scenario in which they will want to be easing again by next Spring if talks don’t go well.

“The last time rates exceeded 0.5% was March 2009 since then the UK has created 3 million more jobs, the FTSE has doubled and house prices have risen 45%. 

“The budget deficit reached 10% of GDP but has since been tamed to less than 2%. Higher rates won’t harm the housing market too much but they pose an extra headwind for London and the South East where momentum is already weak due to affordability and Brexit fears for the London services market.”

Alpesh Paleja, CBI Principal Economist, said: “This decision was in line with our expectations. The case for another rate rise has been building, with inflationary pressures being stoked by a tight labour market and many indicators now suggesting that weak activity in the first quarter of 2018 was a blip.

“The Monetary Policy Committee has signalled further rate rises over the next few years, if the economy evolves as they expect. These are likely to be very slow and limited, particularly over the next year as uncertainty around Brexit takes its toll on business investment.”

Tom Stevenson, investment director for personal investing at Fidelity International, said:  “Mark Carney finally stands and delivers as the Bank of England Monetary Policy Committee voted unanimously to deliver just its second interest rate rise in ten years.  After raising expectations again, the central bank had very little choice but to act today, otherwise it risked ruining what little credibility its forward guidance had left. 

“However, in pressing forward with the rate hike, the Old Lady may have taken an unnecessary risk. Recent inflation data has been softer than expected and UK wage growth continues to remain subdued, suggesting that the UK economy may not be in as rude health as the BoE would like us to believe.

“On top of this, the UK economy continues to face significant headwinds from ongoing Brexit uncertainty as well as wider geo-political concerns.”

Kevin Doran, chief investment officer at AJ Bell, said: “It feels like there is an element of the Bank of England reloading the interest rate gun in case we need an emergency Brexit related cut next year. 

“The UK economy is hardly charging ahead but, with interest rates at historic lows, Mark Carney and Co know that they have little room for manoeuvre should there be a stumble as we head towards the 29 March Brexit deadline next year.  Today’s 0.25 percentage point increase at least reloads one bullet.

“Whilst the increase is an improvement for savers, with inflation still being fuelled by a rising oil price and weak sterling it is little help for the vast swathes people whose purchasing power has been eroded by inflation comfortably outstripping the meagre interest earned on their savings. 

“Let’s hope banks are quick to pass on the increase to at least provide some help to savers although unfortunately this often doesn’t materialise.

“It will also not be welcomed by the vast numbers of UK borrowers, many of whom will only ever have known rock bottom interest rates and hence might be vulnerable to increases.

“From an investment perspective a base rate of 0.75% is still exceptionally accommodative and is likely to continue to stoke asset prices as investors look for a real rate of return above inflation, something that is scarce in cash or Government bonds.”



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