LONDON (Reuters) - The Bank of England said Britain faces its weakest economic growth in a decade this year as uncertainty over Brexit mounts and the global economy slows, but interest rates will eventually rise if an EU divorce deal is done.
While other major central banks have signaled they will hold off from raising borrowing costs, the BoE kept its message that gradual and limited rate rises lie ahead for Britain as long as, in just 50 days’ time, a no-deal Brexit is averted.
BoE Governor Mark Carney said “the fog of Brexit” was causing tensions in the economy and that the risk of an abrupt, damaging departure from the European Union was growing.
“There are still as almost as a wide of range of possibilities as there were the morning after the referendum,” Carney said after the Bank’s policymakers voted unanimously to keep rates at 0.75 percent, as expected.
Britain, the world’s fifth-biggest economy, is due to leave the bloc on March 29 but Prime Minister Theresa May wants more concessions from Brussels to rally her divided Conservative Party behind her exit plan, which parliament voted down last month.
Carney told reporters “not everything may be tied up in a nice package” by Brexit day.
Sterling initially fell a quarter of a cent against the dollar, touching a two-week low, but was up on the day after Carney mentioned the probability of an economic pick-up if a Brexit deal is done.
Interest rate futures indicated investors slightly scaled back their expectations for a rate hike this year.
JP Morgan economist Allan Monks said he now expected a first BoE rate increase in August, or possibly later, rather than May. “The report sends a clear message the BoE is unlikely to raise rates in the coming months,” he said.
The central bank on Thursday slashed its 2019 economic growth forecast to 1.2 percent from a previous estimate of 1.7 percent made as recently as November. That was the biggest forecast cut since immediately after the 2016 Brexit referendum.
Some economists read the forecasts as showing as much as a one-in-four chance of a recession this year, although they also showed a similar chance of growth above 2 percent, underscoring the uncertainty of the economic outlook.
The BoE sees business investment and housebuilding falling this year and a halving of the growth rate in exports.
For 2020, the BoE also lowered its overall growth outlook to 1.5 percent from 1.7 percent, before a stronger-than-previously-expected 1.9 percent in 2021.
The downgraded growth expectations coincided with the Bank acknowledging that investors had scaled back their expectations on how much interest rates were likely to rise.
The BoE said that in the run-up to Thursday’s announcement, markets were pricing in its Bank Rate reaching 1.1 percent by the end of 2021, compared with 1.4 percent at the time of its last forecasts in November.
Howard Archer, an economist with consultants EY Item Club, said this implied two quarter-point rate rises over the next two years, compared with three expected in November.
Rate rises would run counter to moves by other central banks.
Last week the U.S. Federal Reserve signaled an end to its three-year run of hikes. Earlier on Thursday, India’s central bank cut borrowing costs while weak German industrial output numbers raised concerns that Europe’s biggest economy might be heading for a recession.
INFLATION STILL ABOVE TARGET
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.
The main reason the BoE thinks underlying inflation pressures will build is faster wage growth after Britain’s unemployment rate hit its lowest level in more than 40 years.
The BoE’s wage forecasts were little changed with earnings rising by more than 3 percent a year over the next three years.
But the bigger picture remains weak. Private-sector business surveys have suggested the economy has slowed to a crawl and the BoE said on Thursday that half of the businesses it surveyed had begun to prepare for a no-deal Brexit.
It repeated its message that it could either cut or raise interest rates after a no-deal Brexit. Many economists think it would opt to help the economy with more stimulus, as it did after the referendum shock of 2016.
Additional reporting by Andy Bruce; Editing by Angus MacSwan
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