"Smooth" Brexit should allow solid United Kingdom growth

Posted Мая 16, 2017

The UK economy is likely to grow slightly more slowly and inflation increase more sharply than the Bank of England initially expected, it said on Thursday as it otherwise left its main policy levers unaltered. It said inflation would continue to rise further above its 2% target in the coming months, "peaking a little below 3% in the fourth quarter".

But as official data has soured since the start of the year, many economists expect tougher times ahead as Prime Minister Theresa May starts two years of fraught Brexit talks before the country leaves the European Union at the end of March 2019.

The bank now expects inflation to be 2.7% this quarter, up from the 2.4% rate it forecast in February. Against the euro, the pound was trading 0.3 per cent down at €1.18.

Interest rates are set by the Bank's Monetary Policy Committee (MPC), which is tasked with keeping inflation at 2%.

Financial markets are now pricing in two Bank of England rate rises by 2020, up from one when the Bank finalised its latest Inflation Report projections last week.

BoE says the outlook for United Kingdom growth will continue to be influenced by the response of households, companies and financial market participants to the UK's departure from the European Union, including their assumptions about the nature and timing of post-Brexit trading arrangements.

"The Committee judges that consumption growth will be slower in the near term than previously anticipated before recovering in the latter part of the forecast period as real income picks up", May's Inflation Report noted.

The policymakers erred on the side of caution Thursday after economic growth more than halved to 0.3 percent in the first quarter compared with the three months.

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"It doesn't take much for the uncertainty around Brexit to (lead to) lower investment and a weaker labour market".

But if wage growth fails to rise, "there will be consequences", the governor warned.

Mr Carney warned that a "slowdown appeared to be in train" after a sharper-than-expected fall in consumer spending.

It also stressed that its forecasts were based on the assumption of a "smooth" Brexit, implying no cliff-edge disruption to trade and investment in 2019.

Forbes, an external MPC member who will leave the committee in June after one more meeting to return to academia, stuck to the same stance as the last meeting, when she became the first member to cast a vote for a hike in interest rates since January 2016.

The Bank has also revised down its productivity growth forecast for 2017 to a disappointing 0.75 per cent, from 1.75 per cent previously.

However, the BoE added the bank rate, the interest rate available to other lenders, could rise "by a somewhat greater extent" than markets expected, provided its predictions of a continued pick-up in growth would prove accurate. That, in turn, could have a major impact on the British economy as a whole, which is highly reliant on consumer spending.

The Bank of England held rates for another month in May, leaving interest rates at a record low of 0.25% and the bank's QE programmes capped at £435 billion.

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