Bank of England cuts second-quarter growth forecast to zero and warns of higher risks to economy

Central bank holds off raising interest rates from 0.75 per cent as it turns more cautious about outlook

The Bank of England now expects zero economic growth in the second quarter, judging that the economy is running slightly below its potential.

The BoE cut its GDP forecast from a previously expected 0.2 per cent growth and voted unanimously to keep interest rates unchanged at 0.75 per cent, according to the minutes of its latest monthly meeting released on Thursday.

“Recent UK data have been volatile, in large part due to Brexit-related effects on financial markets and businesses,” the Monetary Policy Committee (MPC) minutes said. “Downside risks to growth have increased. Globally, trade tensions have intensified. Domestically, the perceived likelihood of a no-deal Brexit has risen.”

The central bank said growth in the second quarter will be partly hit by the comparison with the first three months of the year, when the economy was boosted by stockpiling ahead of the originally expected Brexit date at the end of March.

Another drag will come from several big carmakers bringing forward their annual shutdowns, from the summer to April, in preparation for the UK’s departure from the European Union, it added.

The BoE was more upbeat about employment, saying it expected it to continue rising in the second quarter, albeit below the average rate seen in 2018 and earlier years.

The bank’s overall more cautious stance brings it closer to the Federal Reserve and the European Central Bank, which in recent days sounded more willing to support their respective economies.

“The tone of the statement and minutes followed the lead from the Fed and the ECB and softened a little compared to May, indicating that the MPC is happy to sit on its hands for the time being,” said Thomas Pugh, UK economist at Capital Economics. The MPC will probably refrain from raising rates until the second half of next year, he added.

“But much depends on the outcome of Brexit,” he said. “If there is a no deal, then the MPC will probably quickly change its tune and support the economy by cutting interest rates.”

Likewise, the central bank said the economic outlook will depend in large part on the nature and timing of Brexit, but warned that its policy response could be “in either direction”.