LONDON — Under normal circumstances, the Bank of England would be looking to cut interest rates. The economy is slowing and inflation is below target.
But these are no normal times in Britain, with a general election due Dec. 12 that will have deep implications for the economy, including for the still unresolved issue of Brexit.
On Thursday, the Bank of England is widely predicted to keep its main interest rate at 0.75% despite the gloomy economic backdrop.
“The upcoming general election has added to the fog of political uncertainty already hanging over the U.K. economy because of Brexit,” said Kallum Pickering, senior economist at Berenberg.
“With economic momentum subdued, and no immediate inflation risks to contend with, expect the bank’s nine-member Monetary Policy Committee to keep policy on hold.”
In economic projections published alongside the interest rate decision, the bank is set to lower its growth forecast for 2020, mainly as a result of concerns over Brexit.
Business investment in particular has weakened since the country voted in June 2016 to leave the European Union as executives wonder what Britain’s future trading relationship with the EU will be.
Prime Minister Boris Johnson called the election in the hope of securing a majority in Parliament that would allow him to push through the withdrawal agreement he negotiated with the EU by Jan. 31, Britain’s new scheduled departure from the EU.
He says “getting Brexit done” will unleash pent-up investment, stoking growth.
“Let’s make 2020 the year of investment and growth,” he said Wednesday outside his residence at No. 10 Downing Street as the general election formally got underway.
Bank of England Governor Mark Carney, who is due to step down early next year, has said that ratification of a Brexit deal would lead to a rebound in some investment, helping growth and potentially leading to one or two quarter-point interest rate increases.
Not everyone is convinced, with Johnson’s political opponents arguing for alternative courses — from scrapping Brexit to another referendum on Britain’s membership.
They claim his Brexit deal will just lead to further uncertainty that keeps investment in check and potentially forces the Bank of England to cut interest rates.
Though ratification of Johnson’s deal soon after the election would pave the way for Britain to leave the EU by the end of January, attention would swiftly turn to the next stage of the Brexit discussions on the future relationship between the EU and the U.K.
Under the terms of the withdrawal agreement, Britain will remain in the tariff-free European single market and customs union until the end of 2020 even though it won’t have any say in its rules. That transition period can be extended once by one or two years, but that must be done by the end of June.
Few experts think a future trade deal can be forged in the space of a few months. The tortuous discussions on citizens’ rights, Britain’s divorce bill and the Irish border that make up the withdrawal agreement don’t point to a speedy resolution.
“This almost certainly won’t be long enough,” said ING economist James Smith.
As a result, Britain could end up leaving the EU’s single market and customs union at the end of next year, which most economists think could lead to a recession in Britain as tariffs and other impediments to trade start to bite.
“In the meantime, this uncertainty will keep a lid on investment,” said Smith.
The fog of Brexit doesn’t look likely to go away anytime soon.
Pan Pylas, The Associated Press