The Bank of England has cut its economic growth forecast for this year and next, warning that households will see a fall in their real take-home pay this year and that output growth will remain below its normal expansion rate for some years.
The Bank’s Monetary Policy Committee (MPC) voted 6-2 to leave interest rates unchanged at 0.25% and actually increased the total amount of cash it is electronically printing to support bank lending.
However, two members of the committee – Ian McCafferty and Michael Saunders – voted to raise borrowing costs and the Bank signalled that investors should prepare themselves for more interest rate increases than they currently expect.
The Bank cut its forecast for economic growth this year from 1.9% to 1.7% and cut next year’s forecast from 1.7% to 1.6%.
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The cuts contrast with strong economic growth elsewhere around the world, which is enjoying its biggest boom in five years.
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In its quarterly inflation report, the Bank also pointed out that household disposable incomes were likely to fall, in real terms, this year, as the squeeze caused by the rising pound found its way into consumers’ pockets.
A subtle change in language also suggested that the Bank may be increasingly worried about the chances of Britain securing a smooth transition out of the EU.
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In its last set of minutes the Bank said that its forecasts were “conditioned on the assumption that the adjustment to the UK’s new relationship with the EU is smooth”, but this time it said that the “projections assume that, in the interim, households and companies base their decisions on the expectation of a smooth adjustment”.
In other words, while households may be expecting a smooth transition, the Bank may no longer be.
In broad terms, the Bank’s inflation forecasts remained similar to the last set: the CPI rate is set to rise to close to 3% in the coming months, and will remain above its 2% target all the way through to 2020.
This may imply more interest rate rises – though few economists expect any change this year.
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The Bank also increased the total amount of cash it is planning to print to support the economy from £545bn to £560bn.
This £15bn increase was due to the fact that banks had lent out more cash in the past year than expected – and bank lending is currently being supported by the Bank’s Term Funding Scheme. This move may come as a surprise, given some in the Bank have raised concerns about rapid growth in consumer credit.
Sterling – supported recently on hopes of an interest rate rise – fell back against the dollar in the wake of the Bank’s remarks, by almost a cent, to $1.3160.
It was also trading at over 90 pence to the euro, amounting to a nine-month low.
The weaker pound bolstered many dollar-earning stocks on the FTSE 100, which closed 63 points higher at 7474.
Source: Sky