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The Bank of England has become the latest central bank to perform a dovish U-turn after signalling that UK interest rates would remain on hold following concerns that the economy was stumbling ahead of Britain leaving the EU.
Mark Carney, BoE governor, on Thursday said Brexit uncertainty and a weakening global economy had forced the central bank to forecast the slowest rate of growth since the financial crisis in 2009, with falling business investment and consumers showing greater caution.
The BoE has retreated from previous plans for multiple interest rate rises, updating forecasts to reveal a one in four chance of a recession in the next six months even in the event of a smooth Brexit process.
This was one of the largest forecast revisions at the BoE since the EU referendum: the bank cut its forecast for UK growth this year from 1.7 per cent to 1.2 per cent.
With the Reserve Bank of India performing a surprise cut to its main interest rate also on Thursday, all the leading central banks have now put on hold plans to tighten policy until there are signs of a renewed global upswing.
Mr Carney said the “fog of Brexit” was creating tensions in financial markets that the central bank needed to monitor, adding: “How these tensions are reconciled once the fog lifts will have consequences for the path of monetary policy in ways that cannot be predicted in advance.”
The BoE’s sharp reductions in its forecasts for UK economic performance have been matched by other central banks around the world and the European Commission in its latest economic predictions. The commission cut its forecast for eurozone growth from 1.9 per cent to 1.3 per cent blaming weakness last year that has led to “weaker momentum” in 2019.
The Federal Reserve started the dovish tilt in monetary policy a week ago, putting it in “wait and see” mode, only to be followed by other leading central banks.
This week Philip Lowe, governor of the Reserve Bank of Australia, changed its guidance to say the next move in rates was as likely to be down as up while a Bank of Canada deputy governor noted that trade tension and uncertainty over business investment was temporarily curbing Canadian economic performance.
The Reserve Bank of India cut its main interest rate by a quarter point on Thursday in a move that will please the government ahead of crucial elections but worry investors that there is less independent judgment at the central bank from the new governor Shaktikanta Das. His predecessor, Urjit Patel, fell out with the government of prime minister Narendra Modi.
Dhaval Joshi, chief European investment strategist at BCA Research, noted that central banks had failed to get policy rates anywhere near levels previously thought as normal.
“Through the past 10 years, no developed economy central bank has been able to hike interest rates sequentially by more than 2 per cent before needing to raise a breather and then swiftly reverse course,” he said.