The Bank of England announced on Wednesday that they were going to keep UK interest rates at the same level, a record low of 0.25%. This was a decision split, with two members of the Monetary Policy Committee voting to raise borrowing costs to 0.5%. However, they were outvoted by the other six members. They concluded that the UK economy was too sluggish to deal with higher borrowing costs.
The pound has dipped in value to a new nine-month low against the Euro. Sterling is now at €1.106 which is down from €1.20 earlier on Wednesday morning.
Sterling has also dipped further against the US dollar to $1.3127 which is around half a cent below the eleven-month high of Wednesday morning before the announcement.
The Bank of England has also downgraded their wage growth forecasts from 3.5% to 3% in 2018. They expect the economy to grow by 1.7% this year which is down from their previous forecast of 1.9%. It’s expected to slow in 2018 to 1.6%, down from 1.7% as previously expected.
The drop in sterling has come as little surprise to people particularly after the forecast changes. Ross Andrews, director of Minerva, a fixed rate bond provider said: “With UK growth forecasts downgraded by the Bank of England, the odds of an interest rate rise this year have now lengthened considerably.
“Even when interest rates finally do start to rise, the minutes once again reminded us that any increases will be gradual and limited.”
When asked about the decision, Governor Mark Carney said that although “softer” productivity growth was one reason, the other was to do with Brexit. He highlighted that ongoing EU negotiations have meant that bosses are hesitant to pay their staff more.
He commented: “We are picking up across the country that there is an element of Brexit uncertainty that is affecting wage bargaining. Some firms, potentially a material number of firms, are less willing to give bigger pay rises given it’s not as clear what their market access will be over the next few years.”
Carney says that there has been a widespread call for a transitional period after Brexit. “There is an understanding that market access, product standards, authorisation issues, data standard issues…will affect both side of the integrated economy between the UK and the EU 27.”
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