The Bank of England decided Thursday to keep its main interest rate at a record low of 0.25 per cent as the economy weakens ahead of Britain's departure from the European Union.
Despite first-quarter gross domestic product (GDP) coming in at 0.3 percent and undershooting the BOE's February estimate that the figure would hit 0.5 percent, the central bank's forecasters have only reduced the outlook for 2017 growth to 1.9 percent from 2.0 percent.
The pound recently jumped to higher levels, on the backdrop of the announcement of a snap election in the UK.
The financial market instruments which the BoE uses to construct its economic forecasts fully priced in an interest rate rise only in the final three months of 2019, nine months later than in the last set of forecasts in February.
For this reason, it's unlikely Mark Carney or the Bank will be particularly bullish today and with political uncertainty both in Westminster and in the UK's relationship with Brussels, there's a slim chance that markets will have to rush to price in expectations of imminent policy tightening. "Unsurprisingly, there was no earth shattering changes to growth or inflation forecasts, with the possible exception of the 2017 (inflation) forecast".
It said consumer spending would be "slower in the near-term than previously anticipated" but forecast it would recover over the next two years. It said that around 500,000 jobs could have been at risk if the bank had not cut interest rates in August.
The Bank of England predicts the annual inflation rate will rise to 2.7 percent by the middle of this year, up from the current rate of 2.3 percent and pushing the official limit of close to 2 percent. Despite the expected recovery in wage growth though, the Bank lowered its inflation forecasts for 2018 and 2019 by 0.2% to 2.4% and 2.2% respectively.
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One reason for the BoE's caution is that the inflation pick-up is largely due to the weaker currency and, in its assessment, wage growth remains modest.
"Wage growth, which has been notably lacklustre of late, is seen picking up sharply next year".
'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'.
He added that the minutes showed that despite these revisions, "some" members besides Ms Forbes continued to note that it would take "relatively little further upside news on the prospects for activity or inflation" for them to consider immediately hiking interest rates.
The Monetary Policy Committee voted 7-1 to keep rates on hold, with one member seeking a quarter-point increase.
"The pound and the strength of the United Kingdom economy, in general, have exceeded expectations by proving resilient, despite warnings from the BOE in the lead up to the referendum", Paresh Davdra, CEO and Co-Founder of RationalFX said as cited by Daily Star. Usually Bank of England inflation forecasts show inflation falling steadily back to target.
The Bank of England has warned about the economic fallout in the aftermath of a Britain's vote to withdraw from the European Union, saying it is already starting to make families poorer.