Bank of England cuts growth forecasts as Brexit weighs

Randall Padilla
August 6, 2017

The pound's decline continued as Mark Carney, the central bank's Governor, appeared before the press after the decision announcement. He also pointed out that interest rates were lower now than they were then. Sterling had already collapsed in value since Britons voted in June 2016 to exit the European Union in a shock referendum. Kristin Forbes, the third member voting in favor of a rate rise during the June meeting, has since departed after completing her term as an MPC voting member. Inflation was broadly unchanged, but wage inflation was revised sharply lower, the BOE now expects real wages to fall by 0.5% this year, suggesting that the BOE (along with other global central banks) still haven't figured out how to fix the problem of low unemployment but stagnant wages. However, the 2018 earnings growth forecast was cut to 3% from 3.5% and 2019's to 3.25% from 3.75%. Hence, to reach its inflation target, the Bank uses Monetary Policy such as adjustment of interest rates in order to meet the target.

While the BOE says it has a duty to present a realistic assessment of the economy, its latest round of analysis is sure to open it up to fresh criticism from pro-Brexit lawmakers.

"Meanwhile the FCA (Financial Conduct Authority) is warning that 2.2 million borrowers are in financial distress, despite ultra-low interest rates, which means the Bank of England is going to have to remove the sticking plaster of loose monetary policy very slowly indeed", he said. Also, the encouragement to save instead of spend may, to some extent, slow down the economy.

At the same time, the bank's governor, Mark Carney told journalists that it is now clear that Brexit uncertainties are weighing "on the decisions of businesses and households" and holding down "both demand and supply". Average wages are likely to stay the same at the 2% expected growth rate.

The pound hit a nine-month low against the euro and fell by more than a cent against the USA dollar.

Unchanged Mark Carney and the Bank of England's panel of rate setters voted six to two to keep rates at 0.25 per cent
Unchanged Mark Carney and the Bank of England's panel of rate setters voted six to two to keep rates at 0.25 per cent

City workers walk past the Bank of England in London March 29, 2016. This time, the equivalent forecasts are 1.7 percent, 1.6 percent and 1.8 percent.

In a statement, the committee forecast weak sterling would continue to boost consumer prices without "adverse consequences for inflation expectations" and that pay growth would pick up after several more months of modest increases. We expect inflation to rise by more than the central bank is now predicting, peaking at 3.4 per cent this year.

In the minutes of the meeting the Bank said some tightening of monetary policy would be required to "achieve a sustainable return of inflation to the target" by a greater extent than the market is now predicting.

The MPC says it expects inflation to rise in the next few months, peaking at around 3% in October.

Other reports by AllAboutTopnews

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