Sterling drops as Bank of England cuts UK growth tip to zero

Sterling drops as Bank of England cuts UK growth tip to zero
The Bank of England

The Bank of England has cut its growth forecast for Britain’s economy to zero for the second quarter of 2019 on and has highlighted risks from global trade tensions and growing fears of a no-deal Brexit.

BoE England officials voted unanimously to hold interest rates at 0.75%, despite some recent suggestions from a couple of policymakers that borrowing costs should go up sooner rather than later.

The UK’s central bank stuck to its message that rates would need to rise in a limited and gradual fashion, assuming Britain can avoid a damaging no-deal Brexit.

But the BoE noted a darkening outlook for the world economy which prompted the European Central Bank, US Federal Reserve and Bank of Japan to signal this week that more stimulus could be on the way.

“Globally, trade tensions have intensified. Domestically, the perceived likelihood of a no-deal Brexit has risen,” the BoE said in its policy statement.

The central bank also highlighted a growing disconnect between the “smooth” Brexit that underpins its forecasts and the market pricing in a much more chaotic exit from the EU that would hurt Britain’s economy and probably mean rate cuts.

Sterling dropped against the euro and the US dollar as investors doubled down on bets that rates will not rise in the next couple of years.

“All things considered, it’s slightly more dovish than one might have expected,” said ING economist James Smith.

He said the BoE had not stepped up its warnings that the market was underestimating the likelihood of rate rises, despite investors having pushed back their bets on the next BoE hike since May.

The BoE said Britain’s economy is now on track to stagnate in the second quarter, rather than grow 0.2% quarter-on-quarter as it predicted last month. It pointed to the likely hangover from rapid stockpiling by companies earlier this year as they scrambled to prepare for the original Brexit deadline in March.

Despite the gloomier outlook for the April-June period, the BoE still expects the British economy to grow in 2019.

- Reuters

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