Bank warns of 'moderate' growth as it keeps interest rates at 0.25%

Posted Мая 11, 2017

A year ago it cut rates and revived its massive bond purchase plan to help soften the shock to the economy of Britain's June vote to leave the European Union.

However, macroeconomic forecasts for both inflation, and wider growth are both likely to see significant changes, with numerous economists speculating that the Old Lady of Threadneedle Street could push up its inflation forecast from a peak of 2.8% to somewhere around 3%.

Carney said the BoE had not tried to forecast what would happen if there was a "disorderly Brexit" where Britain crashes out of the European Union without an agreement on future trade relations. The economic slowdown is expected to continue as higher inflation dampens consumer spending, upon which the United Kingdom economy relies.

"This is going to be a more challenging time for British households", Carney told a news conference, highlighting that inflation would peak at almost 3 percent this year.

The officials stressed, however, that the RBI was also mindful of growth, in line with an Act that tasks the MPC with "maintaining price stability, while keeping in mind the objective of growth". Commenting on this drastic deterioration in wages, Stephen Clarke, an economist at the Foundation said, "Britain's brief pay recovery has come to an end; 40 percent of the workforce are experiencing shrinking pay packets, according to the latest figures, in sectors ranging from accommodation to finance and the public sector".

But Carney said it was important to put this into the context of an economy that was still growing and which employed a record number of people. "For example, the MPC might instead indicate more clearly that "most members" agreed that a tightening in policy would be appropriate over the forecast horizon", he said. Raising interest rates would help limit inflation but hurt growth by making borrowing more expensive for companies and households.

However, the BoE added the bank rate, the interest rate available to other lenders, could rise "by a somewhat greater extent" than markets expected, provided its predictions of a continued pick-up in growth would prove accurate.

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Sterling slipped after the Bank's announcement, which some investors had expected to show a deeper split among policymakers about the need for higher interest rates now.

These market assumptions were based on average prices in the two weeks to May 3. However, the Bank also warned that rates may have to rise sooner and faster than the market now expects.

Policymakers on the Monetary Policy Committee (MPC) kept interest rates on hold at 0.25% as they nudged down the growth forecast to 1.9% for 2017 from 2% in February after a sharp slowdown in the first three months of the year.

Kristin Forbes was the sole policy maker to vote for a rate hike in March.

And while inflation hit a higher-than-forecast 2.3% in February, the recent rebound in the pound since the snap General Election was called might rein in price rises later in the year.

The BoE also slightly cut its growth forecast for this year, from 2% to 1.9% but lifted expectations for growth next year from 1.6% three months ago to 1.7%. The bank expects growth to be slower in the near term but pick up in the latter part of the forecast period as real income picks up.

Looking to reassure British consumers, Carney noted that the bank does not expect that slowdown to continue for a substantial period, arguing that the downward pressures on wage growth are unlikely to hang around long.

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