BOE sees weakest UK outlook since 2009 on Brexit, global slowdown


THE Bank of England (BOE) said Britain faced its weakest economic growth in 10 years in 2019, blaming mounting Brexit uncertainty and the global slowdown, but it stuck to its message that interest rates will rise if a Brexit deal is done.

While other central banks have said they will hold off from raising borrowing costs, the BOE restated that gradual and limited rate rises lie ahead for Britain, as along as a no-deal Brexit in just 50 days' time is averted.

"The fog of Brexit is causing short-term volatility in the economic data, and more fundamentally, it is creating a series of tensions in the economy, tensions for business," BOE governor Mark Carney said in a speech after the bank's policymakers voted unanimously to keep rates at 0.75 per cent, as expected in a Reuters poll of economists.

"Although many companies are stepping up their contingency planning, the economy as a whole is still not yet prepared for a no-deal, no transition exit."

The 10-year British government bond yield fell to its lowest level so far this year at 1.158 per cent, down 5 basis points on the day, reflecting the BOE's weaker outlook.

Sterling dipped a quarter of a cent against the US dollar but quickly recouped those losses, leaving it at a two-week low of US$1.2888. Short sterling interest rate futures indicated investors saw a flatter path ahead for interest rates.

"In the short term, the BOE is definitely more dovish," James Smith, an economist with ING, said. "They are still subtly saying that their preference is to raise rates, but it all hinges on Brexit."

Britain is due to leave the European Union on March 29, but Prime Minister Theresa May is holding out for more concessions from the bloc in an attempt to get her divided Conservative Party behind her plan. The BOE has previously said a worst-case Brexit scenario, with no deal for a transition period and a sudden loss of confidence in Britain among foreign investors, could hammer the economy more than the global financial crisis did.

The central bank on Thursday slashed its 2019 economic growth forecast to 1.2 per cent from its previous estimate of 1.7 per cent, made as recently as November. That represented the biggest cut in its projections since the period immediately after the 2016 Brexit referendum and put Britain on course for its weakest economic growth in the 10 years since the global financial crisis.

The BOE saw a fall this year in business investment and housebuilding, which have been weak in the run-up to Brexit, as well as a halving of the growth rate in exports, reflecting the global slowdown.

For 2020, the overall economic growth outlook was also cut to 1.5 per cent from 1.7 per cent before picking up to a stronger-than-previously expected 1.9 per cent in 2021.

The weaker growth outlook came even as the bank acknowledged that investors have scaled back their expectations on how much interest rates are likely to rise, a key factor underpinning its own projections.

The BOE said markets were now pricing in its Bank Rate rising to 1.1 per cent by the end of 2021, compared with 1.4 per cent at the time of its last forecasts in November.

But it sent a reminder to investors that rates might rise more quickly by saying it saw inflation in two years' time at 2.1 per cent, a touch above its 2 per cent target. REUTERS

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