Sun | Aug 20, 2017

Bank of England maintains rates, ups growth forecast

Published:Friday | November 4, 2016 | 11:00 AM
Bank of England Governor Mark Carney leaves No.10 Downing Street, London, on Monday, October 31, after a regular meeting.

The Bank of England revised up its growth forecasts for the British economy for this year and next as it opted against another interest rate reduction in the wake of the country's decision to leave the European Union.

Conceding that its earlier predictions over the immediate impact on growth stemming from the Brexit vote were too gloomy, the bank's policymaking Monetary Policy Committee (MPC) kept its main interest rate at a record-low 0.25 per cent.

The announcement was widely expected following recent figures showing that Britain's economy grew by a forecast-busting quarterly rate of 0.5 per cent in the July-September period and signs of a marked pickup in inflation. The vote was unanimous among the nine-member panel.

The British economy has showed unexpected resilience following the Brexit vote. Growth has been stronger than many economists, including forecasters at the Bank of England, had anticipated. Analysts feared growth would slow after the June 23 vote to leave the EU, a decision which spurred the bank to cut rates and expand its economic stimulus programme in August.

In its quarterly economic forecasts that accompanied the rate decision, the Bank of England revised up its growth forecasts for the coming two years. Instead of two per cent growth, it's now pencilling in 2.2 per cent for this year. And next year, it's now pencilling in growth of 1.4 per cent instead of 0.8 per cent.

However, the bank cut its 2018 growth forecast from 1.8 per cent to 1.5 per cent.

"In light of the developments of the past three months, all MPC members agreed that the guidance it had issued following its August meeting, regarding the likelihood of a further rate cut in bank rate, had expired," the minutes said.

While growth has surprised to the upside, possibly as a result of the export-boosting fall in the British pound, inflation pressures in the British economy are rising. Though a lower pound makes British exports more competitive in international markets, it has the potential to stoke inflation by raising the cost of imports, such as oil and food. The bank is anticipating that inflation will rise to 2.7 per cent next year, which is way higher than the current one per cent rate and above the central bank's target of two per cent.

Policymakers said they are "monitoring closely the evolution of inflation expectations" and that they were willing to "accommodate a period of above-target inflation." However, Governor Mark Carney said there was a limit to how far they would allow inflation to overshoot target.

Economists have warned the real test to the British economy will come in March, when Prime Minister Theresa May plans to formally notify the EU of Britain's intention to leave. That will trigger at least two years of negotiations which will highlight threats to the economy, the biggest of which is the possible loss of tariff-free access to a market of 500 million people.

"The Bank of England has wisely stepped back from cutting interest rates for now," said Aberdeen Asset Management senior economist Paul Diggle. "The activity data has been better than was expected, and with sterling (the pound) having cratered and inflation already picking up, this wasn't really the time to cut."

The pound has borne the brunt of market unease over the Brexit vote, losing almost a fifth of its value.

However, on Thursday, the pound enjoyed one of its best days since the vote when it surged after a court ruling that the government can't trigger the Article 50 process for Brexit without Parliament's involve-ment. Invoking Article 50 formally starts the two-year countdown to Britain's exit from the EU and the start of likely tough negotiations.

The pound was up 1.5 per cent at US$1.2484 as traders reacted to the news.

Many in the markets hope that the court ruling will at the least, delay the process of Britain's exit from the EU or diminish the government's ability to push through a so-called 'hard Brexit', which would see Britain leave the European single market. The hope is that lawmakers won't give their backing if the government intends to push for that sort of deal.

- AP