BOE keeps rates unchanged at 0.5% despite steep fall in sterling linked to EU referendum
The Bank of England has kept the UK base interest rate at its historic low of 0.5% despite a steep fall in the value of sterling linked to the EU referendum, which policymakers said was likely to exert upward pressure on inflation.
The BoE said disappointing business investment and the weaker outlook for global trade would offset the impact of a cheaper pound and keep inflation in check in the short term before a rise to its 2% target within the next two years.
The Bank’s nine-strong monetary policy committee (MPC) also unanimously voted to keep its quantitative easing asset purchase scheme on hold at £375bn in response to a mixed bag of indicators that it said would keep GDP growth on an upward, though subdued path.
The decision on Thursday means the UK is now in its eighth year of historic low interest rates.
Wading into the EU referendum debate, the MPC blamed a near 10% fall in sterling since mid-November on uncertainty surrounding the expected referendum vote on 23 June. But it said there were few other signs that the decision to hold a referendum had altered the outlook for growth and inflation.
“There appears to be increased uncertainty surrounding the forthcoming referendum on UK membership of the European Union. That uncertainty is likely to have been a significant driver of the decline in sterling. It may also delay some spending decisions and depress growth in aggregate demand in the near term. Overall, however, the committee judges that the outlook for domestic activity to be little changed from the time of the February inflation report,” the MPC said.
A fall in sterling increases the cost of imported goods, which form a large part of the inflation index.
James Knightley, UK economist at ING Financial Markets, said the minutes of the Bank’s March meeting showed policymakers were alive to the risks of Brexit.
“The BoE acknowledge that the Brexit vote has weighed on sterling and may also delay some spending decisions and depress growth of aggregate demand in the near term. This is nothing more than stating the obvious, but it could be the first step into what could become a more concerted campaign to highlight the economic risks,” he said.
