Monday, 21 August, 2017

Bank of England slashes its growth forecast (again)

Office business tools with dollars and calculator on table Office business tools with dollars and calculator on table
Kelvin Reese | 06 August, 2017, 01:34

"The UK economy is faltering and consumer purses are under pressure, so it's no surprise the BoE has decided not to upset the applecart by raising interest rates", Hargreaves Lansdown senior analyst, Laith Khalaf, said.

John Moclair, head of global customer group at Bank of Ireland capital markets, said the euro/sterling exchange rate began the year at around 85p but has crept higher over the past few months and is now trading above 90p.

"His main message is that interest rates will have to rise in the next two years because of the damage Brexit is already doing to the economy".

Despite the warning, Mr Broadbent played down concerns about the consequences of any future hikes in interest rates.

The BoE faces the extra challenge of Britain's leaving the European Union, and its uncertain impact on Britain's economy.

In comments made to the Guardian on 10 July and published yesterday, Carney said the City could prosper after Brexit to reach a size 20 times as big as GDP.

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In its quarterly inflation report, the Bank cut its forecasts for growth to 1.7% in 2017 and 1.6% in 2018 from 1.9% and 1.7% predicted in May. This time, the equivalent forecasts are 1.7 percent, 1.6 percent and 1.8 percent. This is fairly non-committal language and didn't convince the FX market that the BOE is serious about hiking, especially since the hawkish contingent lost one of its members at this meeting - Kirsten Forbes left in June and her replacement, Silvana Tenreyo, didn't follow her footsteps instead choosing to vote with the pack. The Monetary Policy Committee was split with a 6-2 vote in its decision to keep the bank rate on hold.

The Bank said it might raise borrowing costs a bit more than investors expect over the next three years.

"Brexit even overshadows consumer borrowing, which the Bank has lately sounded anxious about". "The chances of a 2017 rate hike now look dead and buried", he added.

The Bank also kept its asset purchase programmes unchanged and said a bank lending scheme would end as previously scheduled in February 2018. If he decides to join the hawks and vote for a rate hike, this would lead to further appreciation in both bond yields and the pound. However, on Thursday the pair plunged and hit a low of 1.1054. He also talks about the slowdown of the economy.

It blamed the downgrade on Britain's stubbornly weak productivity and in part on the Brexit uncertainty.

But while remaining above the Bank's 2% inflation target, it represented an easing from the previous month's 2.9%. The buildup in consumer borrowing also received attention as it has risen to levels last seen before the 2008 financial crisis - this makes raising rates even more hard as borrowers are already struggling to meet obligations in an environment of ultra-low interest rates.

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