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Bank of England downgrades UK economic outlook

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07/02/2019
The Bank of England backed away from plans to raise interest rates as it downgraded its economic outlook for the UK.

Blaming Brexit uncertainty and slowing global growth, the central bank cuts its forecast for 2019 growth to 1.2% from 1.7%. This would be the weakest growth since the recession of 2009.

As expected, interest rates remain unchanged at 0.75%, with the Monetary Policy Committee voting unanimously for no change in the base rate. Sterling fell against other currencies in response.

Andy Scott, associate director at independent financial risk management consultancy JCRA, said: “Sterling slid across the board on Thursday as the market became less optimistic over Brexit, and the Bank of England slashed its growth forecasts. Having rallied strongly for two weeks straight on market optimism that a “hard Brexit” was no longer as much of a risk, Sterling is now in retreat. The reality of the situation is that both the EU and the UK are dug in to their respective positions, with Theresa May insisting that no-deal remains an option and there will be no extension to Article 50.

“With only seven weeks to negotiate an acceptable amendment to the current withdrawal agreement that was so heavily defeated last month, the market is starting to re-evaluate the risk for Sterling. What we have learnt since the Brexit vote in 2016 is that when Sterling rallies on Brexit optimism, the reality will often turn out to be disappointing and Sterling will weaken.

“Meanwhile, the Bank of England just slashed its growth forecast for this year, reflecting the slowdown in the UK economy that appears to be deepening as a result of Brexit and weaker global growth. The slower growth means there is less risk of inflationary pressures building and less pressure for the bank to raise interest rates. The European Commission also slashed its growth forecast for the Eurozone, highlighting the diminished prospects for economic growth in Europe. We see risks that Sterling weakens further while there is no imminent prospect of a breakthrough in the current Brexit stalemate.”

A gloomy picture

Emma-Lou Montgomery, associate director for Personal Investing at Fidelity International, said the inflation report painted a gloomy picture, spelling out a more cautious outlook: “With the ongoing political flip-flopping on Brexit and the impact this heightened uncertainty continues to have on the economy and the financial markets, it’s no surprise that the Bank is treading a more cautious path.

“Like (Fed chairman) Jay Powell last week, Mark Carney recognises that there are significant red flags appearing for the growth outlook which are likely to further hinder expectations for hikes to interest rates this year. While the appropriate path of monetary policy will depend on a number of factors, slow and steady tightening is likely to remain the rhetoric throughout 2019 and even into 2020 as well.

“With interest rates continuing to languish behind inflation, any cash left in an average saving account is likely to continue to lose money in real terms. This means stocks and shares continue to be your best bet for generating a real return in the current environment. With the negative sentiment around UK equities which are selling at a ‘Brexit discount,’ and the FTSE 100 Index offering a dividend yield of 4.5%, they are becoming increasingly attractive for contrarian investors and could present interesting opportunities for those looking for long-term returns.”

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