Bank of England keeps interest rates on hold but lowers growth forecast

Randall Padilla
May 17, 2017

The Bank of England has trimmed its United Kingdom growth forecast for 2017 this year, saying that household spending is slowing more quickly than expected.

However, Carney said that due to the tightening labour market, wage growth should start to pick up in the next few years, helping to ease the pressure on real income levels.

"The weak pound since Britain's vote to leave the European Union has seen inflation surge in recent months with a weaker sterling pushing up the price of imported goods", said Tom Stevenson, investment director for personal investing at Fidelity International. On the weakening economy, which saw GDP increase only 0.3 per cent in the first quarter of 2017 compared to 0.7 per cent in the last three months of 2016, the bank said, "The slowdown appears to be concentrated in consumer-facing sectors, partly reflecting the impact of sterling's past depreciation on household income and spending".

It is thought the Bank will make a marginal downgrade to its forecast for 2% growth this year after the first quarter disappointment, while it may also tweak its inflation forecasts higher.

Michael Saunders, who left Citi to join the Monetary Policy Committee in August, hinted in April he might side with US academic Kristin Forbes, so far the sole supporter on the MPC for raising rates from their current level of 0.25 percent.

In the last comments before the pre-election purdah, Michael Saunders effectively outed himself as within that group, predicting a faster inflation pick-up this year and stronger growth. Weakness in productivity growth and a continuing drag from slack have contributed to this softness, but they can not explain its full extent. However, Mr Carney said he was hopeful real wage growth would return in 2018.

The bank's report, released alongside the interest rates decision, offered better news for the growth outlook as forecasts were raised to 1.7 per cent for 2018 and 1.8 per cent in 2019 from February's prediction for 1.6 per cent and 1.7 per cent respectively.

"Note that the MPC stated that interest rates may need to rise by a "somewhat greater extent than implied by markets" - the forecasts are based on rates rising in Q4 2019, although markets have pulled their expectations forwards to Q1 2019 in recent days".

Presenting a sober assessment of the economic outlook just weeks before the general election on 8 June, the Bank left interest rates on hold at their record low of 0.25% but hinted that they may need to rise sooner than investors were anticipating if inflation continued to overshoot its target.

"We stick with our view that the economic data will begin to roll over in response to Brexit uncertainty before the MPC gets a chance to raise rates - and that it might be another two years or more before the Bank can tighten", said analysts at Nomura.

Sterling fell to a one-week low against the dollar on Thursday after the Bank of England's inflation report showed interest rates were unlikely to rise within the next two years. But earlier yesterday, Britain's Office for National Statistics said first-quarter growth in industrial production was weaker than estimated. That will have repercussions for an economy that is highly reliant on consumer spending to drive growth.

Today's Quarterly Inflation Report from the Bank of England comes at a bit of a crossroads.

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