Warning that UK economy could shrink as Bank of England holds interest rates

The Bank of England has held interest rates firm at 0.75 per cent and warned there was now a one-in-three chance of the economy shrinking at the start of next year as Brexit uncertainty takes its toll.

By David Nowell
Thursday, 1st August 2019, 2:28 pm
Updated Thursday, 1st August 2019, 3:28 pm
The Bank of England
The Bank of England

Members of the nine-strong Monetary Policy Committee (MPC) voted unanimously to keep rates unchanged as it said heightened no-deal Brexit fears had seen uncertainty among firms become "more entrenched", which is hitting the wider economy.

In its quarterly inflation report accompanying the decision, the Bank slashed its growth forecast to 1.3 per cent for both this year and next, down from the 1.5 per cent and the 1.6 per cent previously predicted.

In a warning shot, it also predicted a 33 per cent chance that annual growth will be below zero in the first quarter of 2020 even without a cliff-edge EU withdrawal.

The MPC cautioned that in the event of a no-deal Brexit, "the sterling exchange rate would probably fall, CPI inflation would rise and GDP growth slow".

It reiterated that rates could go in either direction as it would need to balance the need to cool inflation caused by the plunging pound, while also providing support for a flagging economy.

The pound has already tumbled by six per cent since the Bank's last inflation report in May as no-deal fears mount.

UK growth is also being hit hard as businesses hold back on investment due to Brexit uncertainty, which is coming at a time of slowing global economic conditions amid trade tensions between the US and China.