Bank of England leaves rates unchanged, lowers 2017 growth forecast

Sunday, 14 May, 2017

The BoE has edged down its GDP forecast for the United Kingdom this year to 1.9 per cent from 2 per cent, but raised it by 0.1 percentage points in 2018 and 2019. The BoE policy decision was accompanied by the release of the policy statement which supported the view that, on the assumption of a "smooth" transition to Brexit, monetary policy will likely tighten by a somewhat greater extent than the market is now pricing in.

It said consumers were being squeezed between sluggish income growth and rising inflation, and that could be seen in weak retail sales and a sharp fall in new auto registrations in April.

The year over year figure came in at +2.3%, down from +3.0% in February and below the median forecast for 1.9% year over year growth.

At the same time the MPC's growth forecast for 2017 was trimmed from 2% to 1.9%, largely due to a fall in household income and spending.

Financial markets are now pricing in two Bank of England rate rises by 2020, up from one when the Bank finalised its latest Inflation Report projections last week. Officials say the surge in price growth is being driven primarily by a weakened pound and that this effect will eventually fade.

The slowdown appears to be concentrated in consumer-facing sectors, partly reflecting the impact of sterling's past depreciation on household income and spending.

The Bank of England's monetary policy committee (MPC) chose to keep base rate at 0.25 per cent, voting 7:1 in favour of the stance.

The MPC said that wage growth has been weaker than expected but should recover.

The Bank also expects inflation will be higher than previously expected; peaking at 2.8% this autumn.

At the Monetary Policy Committee meeting this month, one of its members, Kristen Forbes, voted for an increase in interest rates from their current level of 0.25% to 0.5%, but the rest of the committee voted to leave them on hold.

In its quarterly Inflation Report, the Bank of England revised down its full year growth forecast for 2017 slightly to 1.9 per cent, from 2 per cent previously.

The committee was comprised of just eight members for this meeting, rather than the usual nine, after the Bank's deputy governor, Charlotte Hogg, resigned when it emerged she had breached the Bank's code of conduct.

"Monetary policy could need to be tightened by a somewhat greater extent over the forecast period than the very gently rising path implied by the market yield curve underlying the May projections", the BoE said on Thursday.

The uncertainty surrounding the UK's future relationship with Europe is still also likely to weigh on investment and hiring for the foreseeable future.

The Bank of England said today it may need to raise interest rates before the late 2019 date markets had been expecting.

The pound was down 0.65% against the greenback at 13:00 BST in London at $1.2854.

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.

Their forecasts show average weekly earnings only rising by two per cent this year, with inflation to peak just below three per cent around the end of the year.