Surprise split as Bank of England leaves UK rates unchanged

Pound slumps as two Monetary Policy Committee members back a rate cut to 0.5%

The Bank of England has kept UK interest rates unchanged, but surprised traders and investors as its members split over whether to deliver a cut ahead of the snap general election in five weeks’ time. This sent the pound to a two-week low.

The Monetary Policy Committee’s vote to keep the benchmark interest rate unchanged at 0.75 per cent was widely expected, but two members voted for a cut.

The MPC said the government’s agreement with the European Union to extend the deadline for Brexit had reduced the perceived likelihood of a no-deal exit and helped support the pound over the past few weeks.

“Now it’s become possible that the picture in the UK could change,” Bank of England governor Mark Carney told a press conference following the decision.

“With the recent UK-EU withdrawal agreement creating the prospects for a pick-up in UK growth, the pace of that recovery will depend, critically, on the extent to which uncertainty over the future UK-EU trading relationship actually dissipates and, to a much lesser degree, by how much the global economy actually picks up,” he said.

“Both are assumed in the MPC’s projections. Neither is assured.”

British voters head to the polling booths on December 12.

The bank expects average UK economic growth of about 0.2 per cent in 2019, roughly half of the average rate seen in the previous three years. It forecasts gross domestic product (GPD) in the fourth quarter of this year to reach 1 per cent, rising to 1.6 percent by the final three months of 2020 and to 1.8 per cent by thefinal quarter of 2021.

The surprise split among voting members pushed the pound to its lowest in two weeks to around $1.2806, but is still more than 5 pe rcent up in a month ago, just before the latest Brexit delay.

Yields on two-year UK government bonds, which tend to be more sensitive to potential shifts in monetary policy than longer-dated paper, dipped below 0.5 per cent to their lowest level so far this week, reflecting investors’ perception that an interest-rate cut may now be more likely.

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