Monday, 23 October, 2017

BoE unlikely to hike rates until after Brexit deal finalised

Kelvin Reese | 17 May, 2017, 02:49

The BoE said it could only do so much to offset a Brexit hit to the economy, and Carney said the two-year process of leaving the European Union did not mean its hands were tied over monetary policy.

Mr Carney said the MPC also issued its forecast assuming a "significant pick-up in wage growth", due in part to business concerns over the Brexit process starting to ease.

MPC holds #BankRate at 0.25%, maintains government bond purchases at £435bn and corporate bond purchases at up to £10bn. pic.twitter.com/vPlTLdPDnD- Bank of England (@bankofengland) 11 May 2017 Challenging time Governor Carney also warned things will be hard for British households this year as higher inflation linked to Brexit will cut people's purchasing power.

The BoE also slightly cut its growth forecast for this year, from 2% to 1.9% but lifted expectations for growth next year from 1.6% three months ago to 1.7%.

He said the Bank was working on expectations of a smooth transitition period but that he expected a drag on productivity in future as the United Kingdom adjusted to new arrangements.

The weak pound since Britain's vote to leave the European Union has seen inflation surge in recent months, pushing up the price of imported goods.

He said growth and inflation could easily exceed the BoE's forecasts made in February, although his comments came before poor economic growth figures for the first quarter.

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USA academic Kristin Forbes, who leaves the MPC at the end of June, again voted to raise rates to 0.5% and warned that the overshoot in inflation could become more protracted without tightening policy now. The MPC expects inflation to rise further above the target in the coming months, peaking a little below 3% in the fourth quarter.

It is widely expected that there won't be any change to the Bank's monetary policy, with interest rates set to stay at a record low of 0.25%, and the bank's QE programmes capped at £435 billion.

Minutes of the rates meeting and the accompanying quarterly inflation report will be watched closely for the Bank's thoughts on the economy amid signs of a consumer spending downturn on the high street.

The report, released alongside the rates decision, also offered some cheer for the growth outlook as forecasts were raised to 1.7% for 2018 and 1.8% in 2019 from February's prediction for 1.6% and 1.7% respectively. As the Brexit vote's effect on the Pound continues to cause inflation to rise and wage growth to slow, living standards in Britain are likely to worsen.

Sterling fell to a one-week low against the dollar on Thursday after the Bank of England's inflation report showed interest rates were unlikely to rise within the next two years. The economy grew by 0.3% in the first quarter of 2017, a sharp slowdown from the 0.7% growth rate in the final three months of 2016.

At the time of writing, the Pound to Euro (GBP EUR) exchange rate was trading down at 1.1855 and the Euro to Pound (EUR GBP) exchange rate was trading up at 0.8434. Since then, markets have moved to price an earlier rate hike by the BoE and sterling has strengthened, which should help to push down on inflation.

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