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Bank of England sharply raises UK growth forecast Bank of England sharply raises UK growth forecast
(35 minutes later)
The Bank of England has raised its forecasts for the UK economy sharply higher, in a move that increases the prospect of an early interest rate rise. The Bank of England raised its forecasts for the UK economy sharply higher, increasing the likelihood the next move in interest rates will be up not down.
After further signs that consumers and businesses have shrugged off the Brexit vote, the Bank used its latest outlook to predict the economy would grow 2% this year and unemployment would be much lower than previously thought.After further signs that consumers and businesses have shrugged off the Brexit vote, the Bank used its latest outlook to predict the economy would grow 2% this year and unemployment would be much lower than previously thought.
That growth forecast was well above the 1.4% GDP growth that policymakers had forecast in November and is in stark contrast to the slowdown predicted by the Bank and others in the wake of last summer’s vote to leave the EU. That GDP growth forecast was well above the 1.4% figure policymakers had forecast in November and is in stark contrast to the slowdown predicted by the Bank and others in the wake of last summer’s vote to leave the EU.
At its rate-setting meeting the Bank’s monetary policy committee, led by governor Mark Carney, voted unanimously to hold interest rates at the record low of 0.25% and to continue with a programme of electronic money printing known as quantitative easing. That was as City economists had expected. At its rate-setting meeting the Bank’s monetary policy committee, led by governor Mark Carney, voted unanimously to hold interest rates at the record low of 0.25% and to continue with a programme of electronic money printing known as quantitative easing.
But minutes from the meeting revealed that some members of the nine-strong committee were growing more worried about inflation, which has been rising as the weak pound pushes up the costs of imports to the UK. The Bank’s forecast for inflation, however, was little changed from its last outlook in November. Presenting the Bank’s forecasts, Carney said that plans for more government spending, stronger world growth and other factors had made policymakers more upbeat about the year ahead. He also conceded the Bank had been too gloomy on the prospects for consumer spending since the Brexit vote.
The statement on policymakers’ inflation worries and the much stronger growth forecast are likely to leave investors scrambling to bring forward their bets on UK interest rate rises. “Growth has remained resilient since the referendum... The monetary policy committee expects growth to be stronger over the forecast period than in November,” he told a news conference.
The minutes noted that consumer spending in particular had been stronger than had been expected shortly after the vote to leave, when the Bank had stepped in with an interest rate cut and more QE to shore up confidence. But he flagged potential challenges ahead and sought to emphasise that the Bank could still move interest rates in either direction.
In the wake of the referendum it has faced the balancing act of safeguarding growth and jobs while being careful that very loose borrowing conditions do not allow inflation to rise too quickly. “The Brexit journey is really just beginning. While the direction of travel is clear, there will be twists and turns along the way. Whatever happens, monetary policy will be set to return inflation sustainably to target while supporting the necessary adjustments in the economy,” Carney said.
Minutes from the meeting revealed that some members of the nine-strong committee were growing more worried about inflation, which has been rising as the weak pound pushes up the costs of imports to the UK. The Bank’s forecast for inflation, however, was little changed from its last outlook in November.
That relatively benign inflation outlook helped push the pound down as the Bank’s forecasts were published, with investors seeing less reason for interest rates to be raised to keep prices rises in check.
The minutes noted that consumer spending in particular had been stronger than had been expected, when the Bank stepped in with an interest rate cut and more QE to shore up confidence.
Since the referendum it has faced the balancing act of safeguarding growth and jobs while being careful that very loose borrowing conditions do not allow inflation to rise too quickly.
Carney has repeatedly asserted that the Bank is comfortable letting inflation go above the government-set target of 2% to protect jobs but that there are limits to how far an overshoot can be tolerated.Carney has repeatedly asserted that the Bank is comfortable letting inflation go above the government-set target of 2% to protect jobs but that there are limits to how far an overshoot can be tolerated.
The minutes to the latest rate-setting meeting noted an important shift for some policymakers. The minutes to the latest rate-setting meeting noted an important shift for some policymakers who now felt “the risks around the trade-off” between supporting growth and controlling inflation “had moved a little closer to those limits”.
“At this meeting, all members agreed that it remained appropriate to maintain the stance of monetary policy. All members also agreed that, while the committee needed to continue balancing the prospect of a period of above-target inflation with the support that monetary policy gave for activity and employment, there were limits to the degree to which above-target inflation could be tolerated,” the minutes said. The key forecast changes in the latest inflation report are:
“For some members, the risks around the trade-off embodied in the central projection meant they had moved a little closer to those limits.”
The key forecast changes in the latest “inflation report” are:
• The UK economy is now expected to grow 2% in 2017, compared with a November forecast of 1.4%. In its final forecasts before the referendum, in May last year, the Bank had forecast 2.3% for 2017.• The UK economy is now expected to grow 2% in 2017, compared with a November forecast of 1.4%. In its final forecasts before the referendum, in May last year, the Bank had forecast 2.3% for 2017.
• The economy is expected to grow 1.6% in 2018, compared with 1.5% forecast in November. The forecast for 2019 is 1.7%, versus 1.6% forecast in November.• The economy is expected to grow 1.6% in 2018, compared with 1.5% forecast in November. The forecast for 2019 is 1.7%, versus 1.6% forecast in November.
• Taken together, the upgrades to previous forecasts amount to 1% over three years• Taken together, the upgrades to previous forecasts amount to 1% over three years
• Inflation to be 2.0% this quarter, 2.7% in early 2018 and 2.6% in early 2019. That compares with November forecasts of 1.8%, 2.8% and 2.6%, respectively.• Inflation to be 2.0% this quarter, 2.7% in early 2018 and 2.6% in early 2019. That compares with November forecasts of 1.8%, 2.8% and 2.6%, respectively.
• Unemployment forecasts have been revised down. Expected to be 4.9% this quarter, 5.0% in early 2018 and 5.0% in early 2019. That compares with November forecasts of 5.0%, 5.5% and 5.6%, respectively.• Unemployment forecasts have been revised down. Expected to be 4.9% this quarter, 5.0% in early 2018 and 5.0% in early 2019. That compares with November forecasts of 5.0%, 5.5% and 5.6%, respectively.
The Bank said the relatively benign outlook for inflation reflected in part its view that wages would not be pushed up as much as it previously thought by unemployment being so low. On the rosier growth outlook, it listed several factors, including government spending plans announced by Philip Hammond. The Bank said the relatively benign outlook for inflation reflected in part its view that wages would not be pushed up as much as it previously thought by unemployment being so low. On the rosier growth outlook, it listed several factors, including government spending plans announced by Philip Hammond in his autumn statement.
“The upgraded outlook over the forecast period reflects the fiscal stimulus announced in the chancellor’s autumn statement, firmer momentum in global activity, higher global equity prices and more supportive credit conditions, particularly for households,” the Bank said. Before the referendum, Carney had said a vote to leave risked sparking a technical recession – two consecutive quarters of the economy contracting – and then after the poll the Bank warned growth would grind to a standstill by the end of 2016.
In the event, consumers carried on spending, the housing market appeared resilient and business activity continued to grow.
But the Bank continues to expect higher inflation to eat into household budgets and slow spending, with repercussions for wider economic growth. It also predicted people will continue to dip into their savings to spend.
Suren Thiru, head of economics at the British Chambers of Commerce said the Bank was now painting a much more optimistic picture but he expects policymakers to hold off rates rises for now given the uncertainty ahead.
“We predict that the MPC will continue to ‘look through’ the expected rises in inflation and opt for an extended period of monetary stability. As a consequence, we expect that interest rates will remain on hold through 2017,” said Thiru.