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Bank of England Raises UK Growth Forecast

Governor Mark Carney said more frequent rate increases than the market currently expects may be required if the economy evolves in line with the bank's forecasts

Alliance News 2 May, 2019 | 4:32PM

Bank of England Governor Mark Carney

The Bank of England on Thursday decided to keep interest rates on hold, as Governor Mark Carney warned that rates may need to rise faster than the market expects in the case of a smooth Brexit and a UK growing economy.

The BoE boosted its forecast for UK economic growth in 2019, but cut its inflation outlook to reflect lower retail energy prices.

The nine-strong Monetary Policy Committee all voted to keep Bank Rate at 0.75%, while also unanimously voting to keep corporate bond purchases at up to GBP10 billion and purchased assets at £435 billion.

At a press conference following the decision, Carney said more frequent rate increases than the market currently expects may be required if the economy evolves in line with the bank's forecasts and the UK leaves the EU with a deal, lifting Brexit uncertainty.

Under this scenario, there are currently insufficient hikes priced in for the MPC to meet its remit, he said.

This comes after the BoE noted market expectations for a rate hike have fallen.

The path for Bank Rate as implied by forward market interest rates is now expected to reach 1.0% in 2021, in February having been predicted to reach this a year earlier, in 2020. This implies the BoE is unlikely to hike rates for another two years.

Over the past months, interest rate expectations in the EU and the US have fallen "significantly", the BoE said, with market expectations for UK interest slipping in step with this.

The BoE, in its quarterly Inflation Report, now sees the UK economy growing 1.5% in 2019, having been revised down to 1.2% in February's inflation report. In 2020, this is expected to pick up slightly to 1.6% before accelerating more substantially to 2.1% in 2021.

In February, the BoE had forecast gross domestic product growth of 1.5% in 2020 and 1.9% in 2021.

Q1 2019 Growth in Focus

The central bank thinks GDP growth will come in at 0.5% in the first quarter of 2019, stronger than expected, but should pull back to 0.2% expansion in the following three months.

This strength in the first three months of the year was due to a boost from Brexit stockpiling, the BoE highlighted, which should prove to be temporary and thus economic growth in the months ahead will likely temper.

"Overall, the MPC judges that stockbuilding has accounted for some of the recent unexpected strength in GDP growth, and that stockbuilding will drag on growth by a similar amount in the second quarter of 2019," the BoE explained.

Inflation, meanwhile, is seen below target in 2019. CPI inflation is forecast at 1.6% in 2019, though ticking up to the bank's target of 2.0% in 2020 and 2.1% in 2021. The new estimate for 2019 is well below the 2.0% predicted in February, while inflation had been expected at 2.1% in both 2020 and 2021.

The cut to the 2019 forecast reflects an anticipated fall in retail energy prices, the BoE said.

Ultimately, the MPC judged its current monetary policy stance to be "appropriate". The BoE reiterated its view that the monetary response to Brexit "will not be automatic and could be in either direction".

Brexit-related uncertainty is seen lingering over the coming months, subsiding gradually over the second half of the BoE's forecast period, in line with the bank's view that the UK will leave the EU in a smooth manner.

"The committee continues to judge that, were the economy to develop broadly in line with its Inflation Report projections, and ongoing tightening of monetary policy over the forecast period, at a gradual pace and to a limited extent, would be appropriate to return inflation sustainably to the 2% target," the MPC said.

 

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