In the aftermath of the UK’s referendum vote which returned an unanticipated leave vote, the Bank of England acted to shore up (somewhat!) sterling and confidence in the UK economy by cutting interest rates, ensuring banking liquidity and re-launching QE measures. Despite this, the value of the Pound has fallen from a pre-vote level of $1.45 to $1.24 currently. This alone means that imported goods have become significantly more expensive which is generating inflationary pressure in the UK economy. Brexit may mean Brexit, but it is generating very considerable business uncertainty going forward as businesses that import or export goods with the EU do not know how the new EU-UK relationship will affect their business models. Not least amongst these difficulties will be the question of the modalities and extent of customs inspections for good crossing into or out of the EU from the UK if, as seems likely, the UK abandons membership of the customs union.
Against this backdrop, the Monetary Policy Committee of the Bank of England decided to leave the interest rate untouched at its record low level of 0.25% where it has been since July 2016. However, the vote was 8:1 in favour of leaving the rate on hold, the first time that the decision has not been unanimous since the July 2016 decision. Analysts were surprised by this and prognosticate that a hike in UK rates is more on the cards than previously supposed.
Official UK inflation is at 1.8% and remains below the 2% BoE target which it is expected to surpass this year, but it is at a 30 month high. The Bank is predicting that the UK economy will grow by 2% this year and cool to an expansion in 2018 of 1.6%, but obviously these estimates can be significantly affected by the Brexit process once Article 50 notification has been issued.