Bank of England keeps rates on hold ahead of UK election

LONDON—The Bank of England warned Thursday that the British economy will grow by less than it had predicted just three months ago as it kept its main interest rate on hold at 0.75%.

The central bank appears to be waiting for more clarity over Britain’s departure from the European Union, potentially after next month’s general election. Two of the nine members on its rate-setting panel, however, voted for a quarter-point cut and that put pressure on the pound, which fell from $1.2855 to $1.2815.

Michael Saunders and Jonathan Haskel, who voted for the cut, argued that the British economy had “a modest but rising amount of spare capacity” and that underlying inflation was “subdued.”

They also said there were risks that economic growth could disappoint due to the impact of a weaker global outlook and persistent Brexit uncertainties on spending by businesses and households.

The rate-setting committee has been reluctant to move interest rates for over a year given the huge uncertainty surrounding Brexit. Britain’s general election on Dec. 12 has the potential to affect the outcome of Brexit, which is now scheduled for Jan. 31 after another extension to the departure date.

It’s unclear whether the election will lead to more Brexit clarity, though, particularly if no one party manages to win a majority.

Prime Minister Boris Johnson hopes his Conservative Party can muster a majority to push through his withdrawal agreement with the EU to facilitate an exit at the end of January. The main opposition Labour Party wants to renegotiate that deal and then put it to the people in another referendum with an option for Britain to remain in the EU.

The Brexit impasse has weighed on the British economy since the country voted to leave the EU in June 2016. It has hit business investment particularly hard as executives have become cautious in the absence of any clarity over Britain’s future trading relationship with the EU.

The bank said growth has been volatile this year in part because of Brexit preparations. Ahead of Britain’s previous Brexit deadlines this year, firms raised stocks to prepare for a potential no-deal Brexit, which would have seen tariffs and other dislocations on trade with the EU.

Overall, it said, the U.K. economy will grow by 1% less over the next three years than it thought at the time of its previous forecasts in August. The bank cut its growth forecast for next year to 1.2% for 2020 from 1.3%, and to 1.8% in 2021 from 2.3%.

“Given the political uncertainty ahead of next month’s election it is not at all surprising that the central bank has decided to refrain from any change in policy, but the calls from some members for rate cuts come as something of a surprise and has caused an adverse reaction in the pound,” said David Cheetham, chief market analyst at XTB.