Bank of England urged to hold interest rates
The Bank of England has been urged to keep interest rates on hold as some City economists are painting a brighter picture for the UK economy thanks to increasing clarity on Brexit and a strong labour market.
The report from the EY Item Club comes after official statistics on the UK’s labour market and other surveys released last week were better than expected, adding to murmurs the Bank of England’s Monetary Policy Committee will not cut interest rates when it meets this week.
In its forecast out this morning, EY raised its GDP growth estimate for 2020 to 1.2 per cent, a slight shift from the one per cent predicted in its previous quarterly forecast. Predictions for 2021 rose from 1.5 per cent to 1.7 per cent.
The report — which said interest rates should remain at 0.75 per cent this month and “likely beyond” —noted that although there was increasing confidence in the economy, businesses and consumers still remained cautious.
Mark Gregory, EY’s UK chief economist said: “There may be some improvements in the economy, but it’s not time to pop the champagne yet… There are still significant unknowns — about the trade deal around Brexit, and the wider policy agenda of government.”
Last week, the ONS announced the best growth in the UK labour market since the three months to January 2019 and a Purchasing Managers’ Index reading revealed the UK economy had begun to grow again, hitting a 16-month high.
The reports and a number of other surveys which show a rise in consumer and business confidence after the General Election result have turned all eyes to Thursday’s decision, where only a few weeks ago an interest rate cut was expected.
Kerstin Braun, president of the Stenn Group, told City A.M.: “There is no need to do anything about the interest rates right now. There is enough dynamic and courage for investments coming out of the real economy to get out of the slow economy that we have had over the last three and a half years.”
Looking further forward, Gregory said he thinks the “key event” to persuade businesses to see beyond Brexit will be the Budget set in March.
“If the chancellor can boost the positive sentiment we are starting to see hints of by persuading businesses there is a plan and backing this up with spending commitments, then we might start to see people begin to look to the future,” he said.
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