Bank of England holds interest rates and raises 2017 growth forecast

The Bank of England has decided to hold interest rates at 0.25% and has almost doubled its economic growth forecast for 2017 from the 0.8% it predicted three months ago to 1.4%.

In a meeting yesterday the Monetary Policy Committee voted unanimously to keep interest rates at 0.25%, with the Bank of England (BoE) signaling that no further rate cuts are expected before the end of the year.

This runs contrary to the Bank’s assertion in August, when it cut rates from 0.5% to 0.25%, that further cuts would be likely before 2017.

The MPC explained that in the three months since August, economic indicators had recovered from immediate post-Brexit lows and following the Bank’s prediction on Thursday that Britain’s economy would grow by 1.4% next year, practically double the 0.8% it predicted three months ago, the pound spiked against the dollar and the euro.

Subsequently, the MPC said there is no longer any need to cut interest rates further or to increase the current programme of quantitative easing.

However, the Bank has said that challenges remain and has currently forecast that unemployment will rise to 5.5% and inflation to 2.75%, saying that while the impacts of inflation would be temporary, there are “limits to the extent to which above-target inflation can be tolerated”.

The next move for interest rates could be up or down, depending on future inflation and growth levels.

In the minutes of its meeting yesterday, the MPC said:

"The future path of monetary policy would depend on the evolution of the prospects for demand, supply, the exchange rate and therefore inflation."

"Monetary policy could respond, in either direction, to changes to the economic outlook as they unfolded to ensure a sustainable return of inflation to the 2% target."

The Bank predicts that the UK economy will grow by 2.2% in 2016, up from the 2% it previously predicted, due to strong household spending.

Similarly, spending on housing is no longer expected to fall next year and the Bank now believes that exports will rise – again reversing an earlier forecast that exports would drop in 2017.

But in the longer term, there exists substantial uncertainty, and the economy is not forecast to recover its 2016 pace of growth.

The Bank believes that ambiguity over the UK’s trading relationship with the EU will continue to damage business investment and as a result the longer-term outlook is weaker.

While the Bank’s latest growth forecast for 2017 has risen from 0.8% to 1.4%, 2018 growth remains more subdued, down to 1.5% from the 1.8% predicted in the August report.

 

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