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Bank warns of 'entrenched' Brexit uncertainty as interest rates held

Dominic Lipinski/PA Wire

By Holly Williams, PA Deputy City Editor

The Bank of England kept interest rates on hold at 0.75% yesterday and warned "entrenched" Brexit uncertainty risks damaging the economy further.

Members of the nine-strong Monetary Policy Committee (MPC) voted unanimously to leave rates unchanged, in the last such meeting before the UK is due to leave the EU on October 31.

In minutes of the decision, the Bank said Britain is expected to avoid a technical recession, but cautioned growth in the third quarter is likely to be weaker than it previously forecast, at 0.2%.

This follows a contraction of 0.2% in the April to June quarter.

The Bank said Brexit uncertainty has become more "entrenched" and is hampering growth, cautioning that mounting political chaos and the prospect of a potential snap election will keep the economy under pressure.

But it will also keep inflation in check, easing the pressure on the Bank to increase rates and could leave the door open to a cut if the UK Government remains unable to resolve Brexit.

"The longer those uncertainties persisted, particularly in an environment of weaker global growth, the more likely it was that demand growth would remain below potential, increasing excess supply.

It reiterated that if the UK crashes out of the EU without a deal, growth will slow, the pound will soar and inflation will rise.

But rates could go in "either direction" in a no-deal Brexit scenario, as it balances rising inflation caused by the pound with falling growth.

The Bank also confirmed that in the event of a smooth Brexit, "gradual and limited" rate hikes will likely be needed to keep inflation in check.

Brexit uncertainty has been weighing on business investment in particular, but it said the recent weakness in growth was due in part to a smaller boost than expected from car production, after some manufacturers had shut down over the summer as well as in April.

"The committee judged that underlying growth had slowed, but remained slightly positive," the Bank said.

Unemployment growth has also weakened, while official figures out separately on Thursday showed retail sales edging just 0.2% higher in August, down from 0.4% growth in July.

The rates decision comes after America reduced rates for the second time this year late on Wednesday amid the trade war between the US and China, as well as slowing global growth.

It also comes as reports suggest Bank governor Mark Carney could be asked to extend his term once more in the event of Brexit being delayed.

The Treasury Select Committee wrote to Chancellor Sajid Javid asking for an update on the timetable for naming a successor to Mr Carney, who is due to step down on January 31.

A Treasury spokesman insisted on Wednesday the process remains "on track" with an appointment set to be made in due course.

The rates decision follows the Bank's warning in its August inflation report of a one-in-three chance of the economy shrinking at the start of next year as Brexit uncertainty takes its toll, even without a cliff-edge EU withdrawal.

But official figures on Wednesday showing inflation fell back to a lower-than-expected 1.7% in August - its lowest level for almost three years - offers the Bank potentially much-needed wriggle room should it need to cut rates.

Allan Monks, an economist at JP Morgan, said: "Unless there is better news domestically and globally, it does appear the Bank is setting itself up for a further dovish shift in November, which would then open the door to a potential easing over the next six months, even if a no-deal has not occurred."