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.
The BoE governor, Mark Carney, has come under pressure recently to follow other central banks that have cut interest rates further and boosted QE to stimulate lacklustre growth.
The Bank of Japan recently cut its main deposit rate to negative to discourage saving and promote investment, following similar moves by the European Central Bank.
Carney has ruled out adopting negative interest rates, though he has said he could cut rates from the current 0.5% and increase QE if it was deemed necessary.
The MPC said growth in the current quarter was likely to follow the same path as the last quarter of 2015, which recorded an expansion in income of 0.5%.
Carney is among several central bankers to urge politicians to use the state’s financial muscle to boost investment and growth rather than rely on monetary policy.Several economists have voiced concerns that monetary policy has lost its potency and is unlikely to prevent a slide in global growth this year.
The MPC said wages would begin to rise towards 3.5% to 4% as inflation increased towards the 2% target, maintaining its view that the economy will reassert the pattern seen before the 2008 crash.
It maintained that recent weakness in wages would be temporary, contradicting analysis by the Resolution Foundation that forecasts a rise in median wages of just 1% over the next four to five years.
Chris Williamson, the chief economist at financial data provider Markit, said the UK was suffering a more severe downturn in growth than expected at the start of the year and the Bank may be forced to act.
“While the Bank stressed that rates are more likely to rise than fall over the next two years, the nagging fear amongst policymakers is that there’s little scope to use conventional rate cuts if the economy enters a new recession, and doubts hang over the effectiveness of further quantitative easing.
“It’s therefore a major concern that the deterioration in the PMI has already pushed the surveys into territory which has in the past seen the Bank of England see the need to inject more stimulus into the economy,” he said.
“The chances of the Bank having to resort to further new non-standard measures to boost the economy have therefore increased considerably in recent weeks, as rising uncertainty regarding ‘Brexit’ has compounded wider concerns about the outlook for domestic and overseas demand.”