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Sterling jumped 0.5% against the dollar to trade at around $1.3084 after the central bank’s Monetary Policy Committee (MPC) voted 7-2 to keep the base rate at 0.75%.
Weak GDP (gross domestic product) figures had led several members to mull a rate cut, but with January data showing an uptick in confidence and activity following the December 12 general election, expectations of an imminent cut had dampened.
The decision comes at a crucial time for the British economy, with the U.K. set to leave the European Union at 11 p.m. London time on Friday. British and European leaders will now enter pivotal negotiations in a bid to secure a free trade agreement before the end of 2020.
The BOE issued a downbeat forecast on the eve of Brexit, with uncertainty around the departure continuing to hurt business investment, reduce immigration and weigh on growth. The central bank forecast growth of just 0.8% in 2020, down from 1.3% in 2019 but rising to around 1.5% in 2021.
Thursday’s report further downgraded the 2019 fourth-quarter U.K. GDP growth estimate to zero. In its last monetary policy meeting in December, the bank’s forecast for growth in the fourth quarter of 2019 was cut to +0.1% from the November projection of +0.2%.
CPI (Consumer Price Index) inflation declined to a rate of 1.3% in December, core CPI inflation fell to 1.4% and core services inflation remains below its target-consistent range. However, the bank suggested that as the outcome of Brexit becomes clearer, growth and inflation are likely to pick up, with inflation expected to advance toward the 2% target late in 2021.
“Monetary policy will be set to ensure a sustainable return of inflation to the 2% target. Policy may need to reinforce the expected recovery in U.K. GDP growth should the more positive signals from recent indicators of global and domestic activity not be sustained or should indicators of domestic prices remain relatively weak,” the BOE’s Monetary Policy Report said.
‘So far, good enough’
“These are still early days, and it is less of a case of so far so good than so far good enough. It will be important for the hard data on activity to follow through on the recent pickup in surveys and for domestic price inflation to strengthen,” he said, adding that recoveries in growth and inflation were not yet assured and that a renewal of trade tensions or other external headwinds could reverse recent progress.
Carney will now step aside to be replaced by Andrew Bailey, formerly chief executive of U.K. regulator the Financial Conduct Authority (FCA).