The Bank of England on Thursday held interest rates at a record low 0.25 percent and crimped its economic growth forecast, as Brexit uncertainties weigh before next month''s general election. Policymakers voted by 7-1 in favour of keeping the rate on hold, the BoE revealed in a statement, while it also trimmed the 2017 growth forecast to 1.9 percent.
However, the central bank suggested it could raise rates more sharply than expected if Brexit talks go smoothly and the economy remains stable. Inflation is currently running at 2.3 percent, above the bank''s target rate of 2.0 percent, raising the possibility that the bank could lift rates to dampen rising prices. The BoE put the inflation jump down to the 16-percent fall in sterling since Britain''s referendum last year to leave the European Union.
On holding rates, policymakers argued that monetary policy could not prevent "the necessary real adjustment as the United Kingdom moves towards its new international trading arrangements". "Attempting to offset fully the effect of weaker sterling on inflation would be achievable only at the cost of higher unemployment and, in all likelihood, even weaker income growth," added the BoE. However, governor Mark Carney later stated that monetary policy could be tightened "if the economy follows a path broadly consistent with the MPC''s central projection."
BoE ''more hawkish'' The bank said such a tightening could be "by a somewhat greater extent... than the very gently rising path" currently implied by the underlying data, assuming that Britain''s transition to a "new relationship with the European Union is smooth". Analyst Peter Ashton from trading firm Eiger FX said there was "arguably a more hawkish undercurrent emerging" at the BoE.
"Two of the key messages given out were that above target inflation can only be tolerated so much, and that rates could rise sooner than perhaps the markets are anticipating." All eight members of the bank''s Monetary Policy Committee (MPC) opted to leave the amount of QE cash stimulus pumping around the economy at £435 billion ($560 billion, 515 billion euros).
On the back of a worse-than-expected first quarter, the BoE nudged growth forecasts back to 1.9 percent, although the forecast had previously been ramped up from 1.4 to 2.0 percent in February. The MPC expects growth to remain at current levels for the rest of the year, blaming the slowdown on consumer-facing sectors, partly reflecting the effect of sterling''s depreciation on spending. But the committee believes that consumption growth will recover later in the year. The pound slumped following the announcement, its fall "exacerbated by the bank''s assessment about household consumption," said Fawad Razaqzada, analyst at Forex.com.
"However everything else was rather positive, with the BoE predicting real incomes to pick up and said first-quarter GDP growth was likely to be revised up." The outlook for Britain''s economy is heavily dependent on what sort of divorce terms it reaches with the European Union and whether it can secure a trade deal. Prime Minister Theresa May has two years to thrash out an agreement with European leaders.
The BoE decision came as economists also pored over news of falling industrial production in Britain and a widening of the country''s trade deficit. Industrial output slipped 0.5 percent in March to record a third monthly drop in a row while the trade deficit hit a six-month high on rising imports.
Comments
Comments are closed.