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BOE hike plans dogged by slow growth, Brexit: decision day guide

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The Bank of England's (BOE) plans for interest-rate increases - already at the mercy of Brexit - are being further disrupted by a slowing economy.

[LONDON] The Bank of England's (BOE) plans for interest-rate increases - already at the mercy of Brexit - are being further disrupted by a slowing economy.

Officials are likely to vote unanimously to hold the benchmark at 0.75 per cent when they announce their decision at noon in London on Thursday. That means much of the focus will be on governor Mark Carney's press conference and the bank's latest forecasts, even if the latter may become obsolete by the end of March.

With 50 days to go before Britain is due to leave the European Union, Prime Minister Theresa May has yet to get her exit plan through Parliament, meaning no one knows how Brexit will end. With the outlook so clouded, policymakers have been boxed in by uncertainty, making it more difficult for them to build on the two hikes they have delivered since late 2017.

Officials are also due to publish their annual review of the supply side of the economy, which last year saw them cut their prediction for the UK's potential growth to 1.5 per cent. While they have stayed largely silent on policy amid the recent political turmoil, they have stuck to the line that limited and gradual hikes are probably needed to keep inflation in check.

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Even that argument has lost some ground since the turn of the year, as price growth slows towards their target quicker than they anticipated, and a steady drumbeat of surveys suggest consumers and the housing market are coming under increasing pressure. The global outlook has also worsened, and the US Federal Reserve has already shifted to a pause its more advanced tightening cycle.

The starkest warning on the health of the economy came this week, when a report showed growth in the dominant services sector came close to a standstill in January as firms became increasingly anxious about Brexit. Taken with similarly disappointing reports for manufacturing and construction, it suggests the economy is at risk of stagnating - or worse - in the first quarter, according to IHS Markit, which compiles the data.

The arguments for a rate hike may be further undermined by a drop in inflation, which is returning to the 2 per cent target at a faster pace than officials predicted in November. The central bank will publish new forecasts for growth and inflation today, although those may be undermined because they are based on a relatively smooth Brexit - a conclusion that seems increasingly unlikely.

As confusion reigns, traders have slashed their bets on any BOE action in 2019, even though Mr Carney has previously warned a no-deal outcome could mean rate hikes are needed. Market scepticism lies in the belief that the BOE would be unlikely to tighten at such a chaotic time, especially as it would be hard to disentangle the impact on demand and supply.

Mr Carney is at risk of being dragged into the political mire at the press conference. Mrs May has set herself a deadline of Feb 13 to negotiate a reshaped deal that could pass in the House of Commons. If the premier can't find an acceptable solution - particularly regarding the controversial plan for the Irish border - members of Parliament will propose their own Plan B options on Feb 14.

Still, it increasingly appears that there is no single Brexit outcome that could deliver a silver bullet for growth. Almost all economists are convinced that a chaotic exit would severely damage the UK - a view shared by the BOE - while a delay would also come at a cost. Even if a deal is agreed on time, the outlook is far from rosy, with the National Institute of Economic and Social Research predicting sluggish growth for the next few years.

Amid the gloom, wage growth has remained a bright spot, setting the ground for a heated policy debate once the Brexit outcome becomes clearer.

While policymakers have voted 9-0 on interest rates for the past four meetings, hawkish members of the Monetary Policy Committee such as Michael Saunders and Andy Haldane are getting increasingly agitated about pay gains - which stand at the strongest level since the financial crisis. That means there could be pushes for hikes relatively quickly, with HSBC predicting there could be a split as soon as Thursday.

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