BOE cuts growth and wage forecasts, keeps rates at 0.25%

The Bank of England keeps interest rates at a record low again and cuts its forecasts for growth and wages as Brexit weighs on the economy. As Ivor Bennett reports, Governor Mark Carney says it would not take much of a pick-up to justify a rate hike.

LONDON • The Bank of England (BOE) has cut its forecasts for economic growth and wages as it extends keeping its benchmark rate at a record low.

The downgrades, linked to Brexit, were enough for the majority of the Monetary Policy Committee (MPC) to keep their cautious stance, with rates remaining at a record low of 0.25 per cent.

The BOE said it now expects Britain's economy to grow by 1.7 per cent this year, down from its May forecast of 1.9 per cent. It also shaved its growth forecast for next year to 1.6 per cent from 1.7 per cent, but kept 2019 at 1.8 per cent.

The new economic forecasts reflect the deterioration of the economic outlook since May as faster inflation outpaces wage gains, holding back consumer spending.

While the bank sees the weaker pound and stronger global growth bolstering exports, uncertainty surrounding the United Kingdom's talks to leave the European Union is creating a drag.

The pound fell after the announcement and was at US$1.3169 as at 12.13 pm in London, down 0.4 per cent from a day earlier. It was trading 1.7888 against the Singdollar.

The bank also said if the economy performs as it expects, the benchmark interest rate will need to rise by a "somewhat greater extent" than markets currently anticipate.

The BOE's forecasts continue to assume a smooth Brexit and are based on a rate hike fully priced in by the third quarter of 2018. There is little sign so far that wage growth is picking up, even with unemployment at the lowest since the 1970s.

Mr Alan Clarke, a rate strategist with Scotiabank, said: "The door is still open to a hike, but it does not look imminent... The most striking thing is that they have downgraded the outlook for wages despite lower-than-expected unemployment, and the inflation profile is a bit lower, despite a weaker pound."

The MPC also announced a rare fourth policy vote yesterday, deciding that it will not extend the Term Funding Scheme, part of its Brexit stimulus package. The programme was aimed at ensuring its rate cut was passed on to consumers and businesses by giving banks cheap funds. Its popularity - almost £80 billion (S$1.4 trillion) has been borrowed already - means the bank is increasing the size of the financing to £115 billion from £100 billion.

BLOOMBERG, REUTERS

A version of this article appeared in the print edition of The Straits Times on August 04, 2017, with the headline 'BOE cuts growth and wage forecasts, keeps rates at 0.25%'. Print Edition | Subscribe