Uncertainties surrounding Britain's exit from the European Union have increase significantly, damping the financial market activity and posing risks to the growth outlook, Bank of England policymakers warned on Thursday as they unanimously left the key interest rate and asset purchase targets unchanged.
The nine-member Monetary Policy Committee, led by Governor Mark Carney, held the bank rate unchanged at 0.75 percent in line with economists' expectations. The previous change in the bank rate was a quarter-point hike in August and the rate is now at its highest level since 2009.
The stock of corporate bond purchases was kept at GBP 10 billion and that of government bond purchases at GBP 435 billion.
"Brexit uncertainties have intensified considerably" since the previous policy session and they are weighing on UK financial markets and on the near-term growth outlook, the bank said.
Britain is preparing to leave the European Union on March 29, 2019.
Despite surviving a recent no-confidence motion triggered within the Conservative Party and delaying a crucial vote on a Brexit deal, Prime Minister May is yet to achieve a consensus among lawmakers regarding Britain's future relationship with the EU.
The prospect of a much-feared "no-deal" Brexit is increasing and recent surveys suggest that businesses are readying themselves to face what could be a most chaotic event.
A no-deal Brexit and the consequent chaos would tie the central bank's hands and markets are now less convinced that the Bank of England will hike interest rates next year.
The bank expects inflation to fall below the 2 percent target in coming months due to lower oil prices and forecast 1.75 percent inflation for January. The MPC also trimmed the growth projection for the fourth quarter of 2018 to 0.2 percent from 0.3 percent.
Policymakers also judged that the loosening of fiscal policy in Budget 2018, announced after the November Inflation Report projections were finalized, will boost UK GDP by the end of the MPC's forecast period by around 0.3 percent.
The central bank reiterated that, were the economy to develop as projected in November and there is smooth adjustment to the possible Brexit outcomes, a margin of excess demand was expected to emerge.
"In that context, an ongoing tightening of monetary policy over the forecast period, at a gradual pace and to a limited extent, would be appropriate to return inflation sustainably to the 2 percent target at a conventional horizon," the bank said.
The broader economic outlook will continue to depend significantly on the nature of Brexit, particularly the future trade relationship between the UK and the EU.
"The monetary policy response to Brexit, whatever form it takes, will not be automatic and could be in either direction," the bank said.
The Bank of England had warned earlier that a no-deal Brexit would cause a severe recession in the UK, the kind not even seen during the global financial crisis a decade ago.
The central bank's analysis projected that inflation could hit 6.5 percent as the pound dives in a no-deal or disorderly Brexit.
Governor Carney also predicted that food prices could jump as much as 10 percent if there is a 25 percent slump in the pound due to a no-deal Brexit.
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