India cuts key rate in surprise bid to lift flagging economy

Daniel Fowler
February 9, 2019

The Bank of England lowered the United Kingdom growth forecast due to Brexit uncertainties as businesses are holding back the investment.

The figure is a significant cut to forecasts given that the Bank had predicted growth of 1.7pc this year as recently as November.

The Bank and Governor Mark Carney have ramped up their warnings over the worsening outlook for the global economy, and China in particular.

Carney was speaking after the central bank delivered a pessimistic view of the U.K.'s outlook, forecasting growth this year at the lowest since 2009, while predicting a dramatic slump in investment and lowering its prediction for pay gains.

"The Bank's forecasts, when put together with recent business surveys, illustrate the harmful impact on the economy the longer that this goes on".

The Bank's quarterly inflation report also signalled rates may not rise until the second half of 2020 as Brexit worries have seen businesses freeze spending, while it warned consumer confidence had "weakened significantly".

"If there is a lot of (government) pressure, then I may cut by a notional 5-10 basis points", said the head of a big state-run bank who asked for anonymity due to sensitivity of the subject.

The bank's Quarterly Inflation report, released on Thursday, warned that Brexit was having a clear negative impact on the United Kingdom economy, saying that since the last Inflation Report, in November: "The further intensification of Brexit uncertainties, coupled with the slowing global economy, had weighed on the near-term outlook for United Kingdom growth".

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"This sent sterling to a two week low around $1.29 ahead of today's announcement from the BoE, and it fell a further third of a cent in the immediate aftermath".

"Eurozone stocks are suffering greatly as investors are fearful the region could be in for an economic downturn", CMC Markets analyst David Madden said.

It's unclear she will be able to get any concessions and fears have grown in recent weeks that Britain could crash out of the European Union without a deal, a worst-case scenario that the Bank of England has previously said could see the British economy shrink by 8 per cent within months and house prices collapse by around a third.

But it said the hit was expected to be "prove only temporary", with a recovery in expansion later in 2019 - though this is based on a Brexit deal being reached by March 29. Nevertheless, the forecasts suggested that just one more quarter-point hike would be needed in the next three years to return inflation to close to the 2 percent target, down from nearly three hikes seen in November.

Meanwhile should British GDP come in at 1.2 per cent, it will be the country's weakest output in a decade.

The surprise move came nearly a week after Modi's administration unveiled an expansionary budget, which included US$13 billion of help for consumers ahead of the poll that's due by May, and days after a top adviser to the prime minister said the RBI should cut rates.

In its minutes, the Bank continued to stress that interest rate rises were likely to be needed "at a gradual and to a limited extent". If the consensus is realised it would mark the sixth month in a row where inflation was below the RBI's medium-term target of 4 percent.

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