Bank of England not to raise interest rates amid UK Brexit process

The Bank of England has warned households that living standards will fall this year as the Brexit vote works its way through to higher prices and meagre pay deals.

Presenting a sober assessment of the economic outlook just weeks before the general election on 8 June, the Bank left interest rates on hold at their record low of 0.25% but hinted that they may need to rise sooner than investors were anticipating if inflation continued to overshoot its target.

The monetary policy committee was split for its second meeting running over the rates decision, with Kristin Forbes again voting against the other seven members and calling for an immediate rise to 0.5% to keep rising inflation in check.

The Bank’s governor Mark Carney predicted living standards could start to recover next year but that in the meantime inflation would be higher than pay growth this year making it a “more challenging time” for households.

He said inflation – already at its highest for more than three years – was expected to continue rising in 2017 as the pound’s weakness since the Brexit vote raises import costs. As the UK now embarks on talks to leave the EU, he also cited uncertainty as a possible factor behind weak wage growth.

“Uncertainty for companies about the outlook may also have made them unwilling to raise wages at a faster pace until they have more clarity about future costs and market access,” Carney said at a news conference to present the Bank’s quarterly inflation report.

The forecasts published alongside the interest rate decision were for economic growth to edge up to 1.9% this year from 1.8% in 2016. That 2017 forecast was little changed from a 2% prediction made in February. Growth was predicted to slow next year to 1.7%, little changed from February’s 1.6% prediction.

The bigger changes were on the inflation forecasts after faster price rises than the Bank expected.

The Bank now expects inflation to be 2.7% this quarter, up from the 2.4% rate it was forecasting in February. It said inflation, on the consumer prices index, would continue to rise further above its 2% target in the coming months, “peaking a little below 3% in the fourth quarter.”

At the same time it cut its forecast for average earnings growth for this year to 2% from 3% pencilled in back in February.

That echoed other forecasters’ warnings over falling living standards. If the Bank’s outlook for pay this year proves correct, it would leave wages falling in real terms – once adjusted for inflation. That will have repercussions for an economy that is highly reliant on consumer spending to drive growth.

But the Bank’s policymakers said weaker consumer spending would be offset by rising business investment and an improving trade performance as the weak pound and solid overseas demand boost exports.

Explaining its rates decision, the Bank hinted that financial markets’ recent expectations were on the low side and that a rate rise could come sooner than many investors expected. However, that statement was based on the market view over the 15 working days to 3 May, which was for only one rate rise to 0.5% over the next three years. Since then, markets have moved to price in around two rate rises.

Minutes from the policy meeting said: “On the whole, the committee judges that, if the economy follows a path broadly consistent with the May central projection, then 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 Bank also said its view was conditioned on a “smooth” Brexit process. Carney explained this meant getting an agreement on future trading arrangements and having a transition period to that agreement.

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.

Paul Hollingsworth, at the consultancy Capital Economics, said the inflation report supported his view that interest rates are set to rise sooner than markets expect.

“If we are right in thinking that the economy will maintain a solid pace next year, rather than slow as the MPC expects, then we think that the committee should be in the position to take the first steps in ’normalising’ monetary policy around the second quarter of 2018,” he said.

But Suren Thiru, head of economics at the British Chambers of Commerce, said the Bank was too optimistic about the UK’s near-term growth prospects.

“We expect that inflation will weaken economic activity by more than the central bank is currently predicting, with wage growth likely to remain persistently below price growth over the next few years. Rising input costs faced by businesses are also likely to weigh more heavily on investment intentions than the Bank of England forecasts currently imply,” he said.

Swati Sharma

SWATI SHARMA is an editor at “On Breaking”. She is a very enthusiastic journalist and has worked for many Esteemed Online Magazines and Celebrity Interview, thus gaining a huge experience before joining the team at On Breaking. She is a great combo of intelligence and passion, which adheres in her write-ups done for the website. She is specialises in Headline, Business and Entertainment.

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