It was confirmed on Thursday that the UK’s base interest rate of 0.75% will remain unchanged, but the Bank of England warned the rates could rise next year depending on the nature of Brexit.
The Monetary Policy Committee voted unanimously, as widely expected, to hold interest rates at 0.75% on Thursday. This decision will have pleased around 3.5 million mortgage holders throughout the country, but will come as a blow to savers. The latest forecasts from the Bank suggested that rates could rise to 1.5% within the next three years. However, the pace of the increase will be dependent on the Brexit deal decided by next March.
The Bank of England has warned that in the event of a ‘no-deal’ Brexit, the UK’s economic output could ‘fall sharply’ and households and businesses in the UK could be met with significantly higher borrowing costs.
The uncertainty over the upcoming Brexit deal has recently been preventing firms from investing in the UK, but Mark Carney, governor of the Bank of England, has suggested that a smooth exit from the EU next year could see a reversal of this trend.
“We do expect a rebound in demand. Business is taking a cautious approach right now as we are at the point of maximum uncertainty so we have some sense of what is being held back, so we will see a rebound in investment,” said Carney.
The Bank has warned, however, that it would struggle to relieve the negative economic impact that would likely result from a ‘no-deal’ Brexit. This has put pressure on MPs to avoid a breakdown of negotiations with the EU, and to work towards a smooth transition.
“An abrupt and disorderly withdrawal could result in delays at borders, disruptions to supply chains, and more rapid and costly shifts in patterns of production, severely impairing the productive capacity of UK business,” said the Bank.
Before the Brexit referendum in 2016, the MPC argued that rates could go either way in the event of a Leave result. After the vote was made, a result which came as a surprise to many, interest rates were cut to a historic low of 0.25%. However, Carney warned against making the assumption that a similar scenario would take place in the event of a ‘no-deal’ Brexit.
“Since the nature of EU withdrawal is not known at present, and its impact on the balance of demand, supply and the exchange rate cannot be determined in advance, the monetary policy response will not be automatic and could be in either direction,” said Carney.
After the referendum in 2016, interest rates were cut because of a fall in confidence in the economy. However, the situation next year is likely to be very different, with the Bank of England responding to real economic damage rather than speculation. A drop in the pound would increase inflation, and together with new tariffs and a fall in the supply chain, this could force the Bank of England to raise the rates. At the same time, decreased trade and stricter financial conditions could lead to lower rates. The unlikely scenario of a ‘no-deal’ Brexit would cause uncertainty and thus it is not possible to predict if interest rates would subsequently rise or fall.