Brexit uncertainty will stop Bank of England raising interest rates before 2019, say economists

Only two of the 80 economists polled in the past few days expect the MPC to tighten policy when it meets on 3 August

The Bank of England is set to report on its latest interest rate call (AFP/Getty)

Above-target inflation won't push the Bank of England to tighten monetary policy this year or next as it waits to see if wage increases catch up with price rises and how divorce talks with the European Union pan out, a Reuters poll found.

Britons voted just over a year ago to leave the EU and envoys on Monday began a first round of negotiations on the terms of the split before Britain departs - with or without a deal - at the end of March 2019.

There is still little lucidity on what tone the talks will take but several Reuters polls over the past few months have concluded that fractious negotiations would be the worst outcome for both Britain's economy and sterling.

“We expect the exit negotiations to be bumpy,” economists at Morgan Stanley wrote in a note to clients. “We see MPC action as dependent on economic performance (and) we assume that the economy will slow and keep them on hold despite inflation overshooting the target.”

The medians in the poll of economists said the Monetary Policy Committee would hold Bank Rate at its record low of 0.25 per cent until 2019. Those forecasters gave, on average, a near one-in-three chance of rates rising before this year is out.

Financial markets have fully priced in a 25 basis point hike by May 2018 but the poll said rates will not rise until 2019, ending that year at 0.75 per cent.

Only two of the 80 economists polled in the past few days expect the MPC to tighten policy when it meets on 3 August, but they are joined by four others who expect an increase by end-December. The chances of a hike in August are only one-in-five, according the poll.

“Weak GDP and wage growth will keep higher interest rates at bay,” said Samuel Tombs at Pantheon Macroeconomics. “Households' real incomes are set to flatline this year.”

Consumer spending played a large part in Britain's economic growth last year but workers' pay fell further behind inflation in the three months to May, even as the unemployment rate hit a new 42-year low.

The MPC is watching wage growth closely as it gauges whether the increase in inflation from the fall in the pound becomes more longer-lasting pressure. The BoE expects wages to rise 2 per cent this year before picking up in 2018 and 2019.

But that will lag price rises as inflation will average 2.7 per cent this year, 2.6 per cent next and 2.2 per cent in 2019, the Reuters poll found. The MPC targets it at 2 per cent.

Inflation hit an almost four-year high of 2.9 per cent in May, a bigger increase than economists had expected. Figures due later on Tuesday will probably show prices rose at the same annual rate in June.

Although the predicted recession after Britain voted to leave the bloc never happened, growth slowed sharply at the start of 2017 as consumers felt the hit from rising inflation.

GDP growth is forecast between 0.3 and 0.4 per cent through to the end of 2018, barely keeping pace with the euro zone. On an annual basis, the forecasts are for 1.6 per cent this year and just 1.3 per cent in 2017.

Reuters