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Bank of England stands pat on interest rates despite inflation and Brexit worries

Real wages are likely to come under further pressure as inflation is expected to overshoot the Bank of England's 2% target until 2020
Mark Carney
BoE Governor Mark Carney says monetary tightening may be needed over next three years

The Bank of England has cut its economic growth forecasts and expects inflation will peak at 3% in October, driven by a weaker pound following the UK’s vote to leave the European Union.

In a press conference on the central bank’s Inflation Report, Governor Mark Carney warned that Brexit is affecting the UK economy as the nation adjusts to a “new and uncertain” relationship with the EU.

The Bank slashed its economic growth forecasts for 2017 to 1.7% from 1.9% and lowered next year’s estimate to 1.6% from 1.7%.

On inflation, the Bank said it sees it overshooting its 2% target through to 2020 and will average about 2.7% in the third quarter, up from 2.6% predicted in May.

As inflation rises, the BoE expects to see a fall in household disposable incomes, in real terms, this year.

The Inflation Report was released alongside the Bank’s policy announcement and meeting minutes in what markets have dubbed ‘Super Thursday’.

Bank of England votes 6-2 to stand pat on interest rates 

The Bank’s Monetary Policy Committee voted 6-2 to keep interest rates unchanged at 0.25% and leave the asset purchase programme at £435bn.

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. 

“If the economy were to follow a path broadly consistent with the August central projection, then monetary policy could need to be tightened by a somewhat greater extent over the forecast period than the path implied by the yield curve underlying the August projections,” the minutes said.

Minutes and forecasts lack hawkish tone, says Pantheon Macroeconomics

Pantheon Macroeconomics chief economist, Samuel Tombs, said the minutes and the latest forecasts lacked the hawkish tone to warrant markets’ previous expectations for a 45% chance of a rate hike by the end of this year.

He said while the MPC expects some tightening, its statement “falls a long way short of giving markets a stronger steer”.

Laith Khalaf, senior analyst at Hargreaves Lansdown, said it was no surprise that the BoE decided to hold fire on lifting interest rates given the slowdown in economic growth and consumer spending.

BoE needs to tighten policy as consumer lending boom presents risks, says Hargreaves Lansdown

Khalaf said the worry is that consumer borrowing looks to be building and has breached the £200bn mark for the first time since 2008.

“Meanwhile the FCA (Financial Conduct Authority) is warning that 2.2 million borrowers are in financial distress, despite ultra-low interest rates, which means the Bank of England is going to have to remove the sticking plaster of loose monetary policy very slowly indeed,” he said.

“Unfortunately that spells many more years of poor returns for cash savers.”

He added: “The Brexit process is really only just beginning, and it will have many long-lasting implications. Consequently the task of determining just what effect Brexit had on the UK economy will mostly fall on the shoulders of tomorrow’s historians, rather than today’s economists.”

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