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Bank of England – heading back to the dovecote

Laith Khalaf

The Bank of England has kept interest rates on hold at 0.25 percent, with the committee voting 6-2 in favour of maintaining bank base rate. From Laith Khalaf, Senior Analyst, Hargreaves Lansdown.

Last time around three members of the committee voted for a rate rise, this is now down to two, following the departure of Kristin Forbes. Her replacement, Silvana Tenreyro has voted to keep rates on hold in her first outing.

In its accompanying Inflation Report, the bank also downgraded its forecast for UK economic growth for 2017 from 1.9 percent to 1.7 percent, following disappointing GDP growth in the first and second quarters of this year, of 0.2 percent and 0.3 percent respectively. On the back of the news the pound fell one cent against the dollar to trade at 1.3147.

The UK economy is faltering and consumer purses are under pressure, so it’s no surprise the Bank of England has decided not to upset the applecart by raising interest rates. June also saw a surprise drop in inflation, relieving pressure on the central bank to tighten policy.

However, consumer borrowing still looks to be building up, and has now breached the £200 billion mark for the first time since 2008. Meanwhile the FCA is warning that 2.2 million borrowers are in financial distress, despite ultra-low interest rates, which means the Bank of England is going to have to remove the sticking plaster of loose monetary policy very slowly indeed.

Unfortunately that spells many more years of poor returns for cash savers. The Office for Budget Responsibility thinks interest rates will rise to just 1 percent by 2022, still below the rate of inflation, assuming the Bank of England meets its 2 percent CPI target. Cash savers who have been clinging on in the hope of higher rates will probably find they have to travel further than expected to get to the pot of gold at the end of the rainbow. Even when they get there, they may find only a few coppers to rub together after inflation has taken its toll.

The Bank of England has also downgraded its growth forecasts for 2017, on the back of a pretty disappointing first half of the year. Some will point to this as evidence that Brexit is taking its toll on the UK economy. However while the last two quarters have certainly seen a dip in growth, overall economic performance has been better than expected since the EU referendum, particularly in light of some of the dire forecasts that preceded the vote.

The Brexit process is really only just beginning, and it will have many long-lasting implications. Consequently the task of determining just what effect Brexit had on the UK economy will mostly fall on the shoulders of tomorrow’s historians, rather than today’s economists.’

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