Bank of England cuts growth forecast as Brexit bites

Aug 04, 2017, 00:29
Bank of England cuts growth forecast as Brexit bites

The rate-setting Monetary Policy Committee also voted, as expected, by six votes to two to keep interest rates on hold at 0.25 per cent.

Market participants look ahead to the release of a duo of economic reports on Thursday, which may offer further guidance on the strength of US economy.

Kristin Forbes, one of the MPC (Monetary Policy Committee) members to back a rate rise in June, departed the group and was replaced by Silvia Tenreyro, an academic at the London School of Economics.

In its closely watched trio of releases - its rate decision, monetary policy statement and quarterly inflation report - the United Kingdom central bank said economic growth and wages remain sluggish in the near term because of uncertainty over the U.K.'s exit from the European Union.

However, in the minutes on the policy meeting the Bank said some monetary tightening may be needed in the next three years if the economy improved as expected.

But the push for an interest rate rise was dealt a setback with last month's news of a surprise fall in inflation, to 2.6% in June, down from 2.9% in May.

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"The door is still open to a hike, but it doesn't look imminent", Alan Clarke, a rate strategist with Scotiabank said, as quoted by Reuters.

The Bank also kept its asset purchase programmes unchanged and said a bank lending scheme would end as previously scheduled in February 2018.

However, the central bank also sought to send a hawkish message that a rate rise could still be coming sooner than markets now expect.

The bank said that its projections are conditioned on the average of a range of possible outcomes for the UK's eventual trading relationship with the European Union, with the pound falling one cent against the dollar after today's forecast.

Given weak productivity, the BOE still sees economic growth being enough to generate domestic inflation pressure and close the UK's output gap within three years.

Bank governor Mark Carney said the United Kingdom is "in the teeth of it right now", but added that the Bank expected growth to accelerate if a "smooth" Brexit transition is achieved. Business investment has also been suppressed by uncertainty over the post-Brexit trade arrangements for United Kingdom firms.

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When the bank in previous years did pull the trigger, quarterly economic growth was 0.8 percent on average, and was never below 0.5 percent, according to Bloomberg Intelligence economists Dan Hanson and Jamie Murray.

The correlation between the FTSE 100 and the pound has returned to negative today, with the FTSE 100 up 1.3% so far and GBP/USD down 1.15%.

The Bank also confirmed it will withdraw the Term Funding Scheme (TFS), part of the monetary policy stimulus introduced a year ago in the aftermath of the Brexit vote to boost bank lending.

It blamed the downgrade on Britain's stubbornly weak productivity and in part on the Brexit uncertainty.

The MPC reconfirmed inflation hit 2.6% in June, up from 2.3% in March, and said it expected it to hit 3% by October this year. Conditional on the current market yield curve, inflation is projected to remain above the MPC's target throughout the forecast period.

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