potinsnews.com March 25, 2017

Bank of England in dramatic upgrade of United Kingdom growth forecasts

03 February 2017, 12:38 | Chelsea Hernandez

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Shoppers in Norwich

Minutes of the latest Monetary Policy Committee (MPC) decision showed policymakers voted unanimously to keep United Kingdom rates on hold at 0.25 per cent as the bank made sweeping upgrades to its growth outlook.

The bank said it now expects gross domestic product to rise by 2% in 2017, an upgrade from the 1.4% it forecast in its November inflation report.

"With the Old Lady of Threadneedle Street prepared to keep sitting on its hands when it comes to raising rates and with inflation expected to breach the central bank's 2 per cent target this year, anyone with savings still sitting in cash will struggle to generate real returns".

The Bank of England will probably try on Thursday to avoid adding to speculation about a first interest rate hike in almost a decade, even as it acknowledges the resilience of Britain's economy since last year's Brexit vote shock.

The BOE also increased its GDP growth foreceast to 2.0% from 1.4%, signalling the better-than-expected performance of the United Kingdom economy since the June referendum.

The BOE slightly increased its inflation forecast, predicting inflation will peak at 2.8% in the first half of 2018.

As expected, the Bank maintained interest rates at their record low of 0.25 percent.

The Treasury had warned that Britain could have crashed into recession by the end of a year ago, while Bank governor Mark Carney suggested a Leave vote was the biggest risk to the country's economy.

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A fall in the pound leads to higher imported costs which boost consumer prices and cause inflation to rise.

Unemployment forecasts have also been revised down, with the unemployment rate expected to be 4.9% this quarter, compared with the 5% predicted three months ago. The Bank also noted that United Kingdom growth upgrades were linked to a relaxed United Kingdom fiscal stance, momentum in the global economy, easier credit conditions and strong 2016 GDP growth.

It has also pushed up the estimates for 2018 and 2019 by 0.1 per cent - to 1.6 per cent and 1.7 per cent respectively.

Continued strong growth would make it "more difficult" to "tolerate" inflation above the two per cent target implied by the February projections.

The continuing suitability of the current policy stance depends on the trade-off between above-target inflation and slack in the economy, the bank said in the monetary policy summary.

Consumers are predicted to reduce their saving temporarily rather than their spending in the face of slowing in real income growth as inflation overtakes wage growth.

The Bank has also been surprised by the modest rises in wage growth.

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