Bank of England likely to cut UK growth forecast
Less speculation that policymakers will raise interest rates any time soon
Mark Carney signalled in June that a Bank of England rate increase may be approaching. Economists doubt it is here just yet.
The governor, overseeing an economy that slowed sharply in the first half, will probably lower growth projections for the next two years when he presents the central bank’s latest forecasts next week, according to economists. The inflation outlook is expected to be unchanged.
In addition to a loss of economic momentum, wage growth has disappointed this year, damping down speculation that policymakers will raise interest rates any time soon to tackle faster-than- targeted inflation. The economy is too brittle to absorb tighter policy, and more knowledge of the details of the UK’s exit from the European Union is required before officials will act, according to analysts at Citigroup.
“Even a small rate hike could have repercussions for financial conditions and the economy in its current fragile state,” said the economists Christian Schulz and Ann O’Kelly. “Until there is more clarity about the Brexit deal, which is unlikely before March 2019, the BOE will probably abstain from adding to that fragility by hiking.”
Economists predict the BOE will keep its key interest rate at a record-low 0.25 percent and leave the size of its quantitative-easing program unchanged on August 3. Alongside the announcement, the Monetary Policy Committee (MPC) will update forecasts in its quarterly Inflation Report, and Mr Carney is due to hold a press conference to explain the decision. Investors will scour his comments for clues on his latest thinking on the potential longer-term threats from Brexit.
At their last meeting in June, policymakers surprised investors when three out of the eight voters dissented in favour of higher rates and a fourth subsequently suggested he might follow suit. Since then though, the office for national statistics said there has been a “notable slowdown” in the economy and inflation retreated from its recent high.
Analysts see the BOE keeping its key rate on hold until mid-2019, according to a Bloomberg survey. Investors place odds of less than 40 per cent on a rate increase this year, down from almost 60 per cent a month ago.
All but one out of 19 economists in the Bloomberg survey see the MPC cutting its growth forecast for this year next week, while the majority also see the panel lowering its projection for 2018. However, most see the bank leaving its estimates for inflation unchanged for both years.
In its last forecasts in May, the BOE projected growth of 1.9 per cent this year and 1.7 per cent in 2018, with inflation at 2.8 per cent and 2.4 per cent, respectively.
Updated: July 30, 2017 10:45 AM