BOE lifts economic forecast again

The Bank of England premises in the City of London. Despite upgrading its forecast for the economy, the BOE has left its key rate at a record-low 0.25 per cent.
The Bank of England premises in the City of London. Despite upgrading its forecast for the economy, the BOE has left its key rate at a record-low 0.25 per cent.PHOTO: REUTERS

LONDON • The Bank of England (BOE) upgraded its forecast for the economy for the second time since the Brexit vote and revealed that some policymakers have become more concerned about accelerating inflation.

The revised outlook follows stronger-than-expected growth and reflects an easier fiscal stance, buoyant consumer spending and an improving global environment.

The Monetary Policy Committee now sees gross domestic product rising 2 per cent this year, up from 1.4 per cent in November, when it also lifted its projections.

Despite the upgrade, the BOE yesterday said it has left its key rate at a record-low 0.25 per cent and its bond purchase programmes unchanged.

In a sign that a change is not imminent, officials said there is more slack in the economy than previously thought and the jobless rate can fall further without generating inflation. They also warned the decision to leave the European Union would continue to create uncertainty.

Keeping a broadly neutral policy stance allows BOE governor Mark Carney time to assess the potential longer-term economic fallout from Brexit. The US Federal Reserve took a similarly cautious tone on Wednesday, giving few signals on the timing of its next rate increase as it tries to figure out what President Donald Trump's actions would mean for the US outlook.

The BOE sees inflation averaging 2.7 per cent this year and 2.6 per cent in 2018, little changed from its November projections. It will slip back to 2.4 per cent in 2019. The forecasts are based on expectations for an interest-rate hike early that year, though the curve has steepened since those forecasts.

The pickup in prices partly reflects the pound's 15 per cent drop since the Brexit vote in June. The upward pressure on inflation has eased somewhat, with sterling up 3 per cent since the November forecasts. Policymakers said further currency volatility is likely as more details about the EU exit emerge.

They also expect faster price growth to weigh on consumers, though less than previously thought. Household spending is forecast to rise 2 per cent this year, up from 1.25 per cent in November. Housing investment - previously seen as almost stagnating - is now expected to jump 3 per cent.

While the Brexit impact has been limited so far, Britain has yet to begin the formal exit process. Prime Minister Theresa May plans to trigger that by the end of next month. Lawmakers gave their backing in an initial vote in Parliament on Wednesday, though there will further votes in the coming weeks before she can go ahead.

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A version of this article appeared in the print edition of The Straits Times on February 03, 2017, with the headline 'BOE lifts economic forecast again'. Print Edition | Subscribe