‘Confidence is up, orders are rising’ – business bounce sees interest rates held

The Bank of England has opted against a cut in interest rates, following a post-election surge in business confidence and spending at the start of 2020.

The bank’s Monetary Policy Committee has voted 7-2 to keep rates at 0.75% – despite earlier hints that a cut was on the horizon – amid early signs of renewed growth in the nation’s economy.

The bank said 2019 had seen economic growth slow due to firms’ uncertainty about Brexit, meaning many reined in their spending and UK inflation dropped.

However, it says the latest data suggests ‘the uncertainty facing businesses has fallen and that global growth has stabilised’.

It went on to predict that this is a trend which is expected to continue, and added: “If that happens, it should help to support growth here in the UK.”

The decision came with the caveat that if predictions of growth prove off-target, there may yet be a need to cut rates.

However, early feedback from the business community has been positive, with the bank praised for retaining ‘wiggle room’ if fresh Brexit worries ‘eat into business activity’.

Dr Kerstin Braun, President of Stenn Group, an international provider of trade finance headquartered in London, said: “With signs that UK companies are ready to invest in a post-Brexit world, it’s a good call for the Bank of England to hold rates during this transition and let the economy kick-start itself.

Dr Kerstin Braun, President of Stenn Group.

Dr Kerstin Braun, President of Stenn Group.

“There is no need to do anything to interest rates right now. There is enough dynamic coming out of the real economy to get out of the stasis that we have had over the last three-and-a-half years.

“With momentum finally coming out of business, the best way for the government to support the turnaround is to go-ahead with large infrastructure projects that have been dangled before the voting public.

“We expect the Bank of England to hold rates for a while longer, whilst the UK adapts to post Brexit.”

And that view was shared by Tej Parikh, Chief Economist at the Institute of Directors.

He said: “There is mounting evidence that the UK economy may have experienced a bit of a post-election bounce, so on balance the Bank made the right call to hold interest rates for now.

Taj Parikh, Chief Economist at the Institute of Directors

Taj Parikh, Chief Economist at the Institute of Directors.

“Confidence is up, orders are rising, and firms are thinking about making new hires and investments, but with uncertainty still on the horizon, it’s unclear just how much economic activity will change over the course of 2020.

“The MPC will want a clearer run of data to see how underlying economic conditions are reacting to the new political environment, which may place the Bank in a better position to make a decision on rates at its next meeting.

“Another unknown for rate-setters’ calculations is the extent of the fiscal boost at the forthcoming Budget, which backs up their decision to sit on rate changes for now, at least until their next post-Budget meeting in March.

“On the bigger picture, withholding a rate cut today does also afford the Bank greater wiggle-room in the future if uncertainty eats into business activity and the fiscal boost fails to sufficiently stimulate the economy.”