Interest rates set to remain at 0.5% after OBR downgrades growth forecast

The Bank of England’s Monetary Policy Committee (MPC) voted unanimously to keep interest rates at 0.5% - the record low figure at which rates have now remained for seven years.

All nine members of the MPC opted to freeze rates, following this week’s Budget in which the Office for Budget Responsibility (OBR) downgraded its growth forecast for the UK economy this year from 2.4% to 2.0%.

Commenting on the decision, David Kern, Chief Economist at the British Chambers of Commerce (BCC), said: ‘The downgrading of the OBR’s UK growth forecast in the Chancellor’s Budget highlights the challenging circumstances that the UK economy will face over the coming year, making the MPC’s decision to keep interest rates and its QE programme on hold unsurprising.

‘The OBR’s downgraded UK inflation forecasts, and the fact that the bank’s own 2% inflation target is unlikely to be reached until late 2017 at the earliest, mean that a rise in interest rates is now likely to remain off the table for the foreseeable future.’

Other commenters noted that the forthcoming EU referendum only made the decision to hold rates all the more inevitable. Chris Williamson, Chief Economist at data firm Markit, said: ‘The Bank highlighted how uncertainty regarding the June vote on the UK's membership of the EU is exacerbating wider concerns about the domestic and global economic outlook.

‘Policymakers noted how spending by businesses and overall demand in the economy could weaken as a result of the intensifying Brexit fears, which would worsen an already shaky start to the year.’

Mark Carney, Governor of the Bank of England, recently caused controversy when he appeared to speak in favour of remaining in the EU at a meeting with the Treasury Committee earlier in the month.

On that occasion, he described Brexit as the ‘biggest domestic risk to financial stability’ – a statement which drew criticism from Leave campaigners, who claimed that it undermined the Bank’s official position of political neutrality.