Thursday 21 September 2017

Bank of England keeps interest rates on hold and warns on economic growth

Bank of England governor Mark Carney
Bank of England governor Mark Carney

Holly Williams

The Bank of England has warned economic growth will remain "sluggish" as it kept interest rates on hold amid a tightening squeeze on family incomes.

Policymakers on the Bank's Monetary Policy Committee (MPC) voted 6-2 to keep rates at 0.25pc, with fewer members this month calling for a rise as lacklustre economic growth has weakened support for a hike.

In its quarterly inflation report, the Bank cut its forecasts for growth to 1.7pc in 2017 and 1.6pc in 2018 and cautioned the squeeze on household incomes would continue, with inflation still expected to surge close to 3pc in the autumn.

But it signalled rate hikes will be needed over the next few years to rein in Brexit-fuelled inflation and said borrowing costs may need to rise by more than expected in financial markets.

Members also voted to withdraw part of the mammoth economy-boosting package unleashed a year ago in the aftermath of Brexit.

It will call time on the Term Funding Scheme to offer cheap-finance to banks from next February, although it said it was now expected to offer £15bn more under the scheme - at £115bn.

In minutes of the rates decision, the Bank said: "In the MPC's central forecast, gross domestic product (GDP) remains sluggish in the near-term as the squeeze on households' real incomes continues to weigh on consumption."

On rates, it reiterated that "some tightening of monetary policy" would be needed to cool inflation and by a "somewhat greater" extent than markets expect.

Markets are currently forecasting the first rise in the third quarter of next year and another in 2020.

But the Bank stressed that any hikes would be "gradual" and "limited".

The Bank's downgraded growth forecasts for this year and next compare with the 1.9pc and 1.7pc predicted in May. It maintained its forecast for growth of 1.8pc in 2018.

Sterling fell against the dollar and the euro following the news. The pound was 0.5pc down at 1.31 US dollars and fell 0.4pc to €1.11.

The no-change decision comes after recent disappointing growth figures have dampened mounting expectations of a hike, with GDP edging up to 0.3pc in the second quarter from 0.2pc in the previous three months.

Growth is likely to remain at 0.3pc in the third quarter, although it will start to pick up slightly at the end of the year, according to the Bank.

Its latest inflation report offered little cheer for households being hit by soaring inflation and paltry pay rises as it said the squeeze will get worse before it gets better.

Read more: Sterling skids to 9-month low against the euro as Bank of England keeps rates unchanged

It added that monetary policy "cannot prevent" the hit to incomes over the next few years, but expects wages will recover "significantly" towards the end of its three-year forecast.

The economy is also set for a boost from surging demand for British goods thanks to the weak pound, which will offset some of the lower consumer spending.

The decision comes a year after rates were cut to 0.25pc last August following the shock EU referendum vote, which sent the pound slumping.

The Bank estimates it will likely take four years to fully feed through to prices and the economy.

Prior to the Bank's latest rates verdict, there had been growing clamour for a rate rise as inflation ramped up pressure on hard-pressed households, with three policymakers calling for an increase to 0.5pc in July.

Inflation eased back to 2.6pc last month from 2.9pc in June, although the Bank said this was expected and will pick up once again over the coming months.

The Bank said the overshoot relative to its 2pc target was "entirely" down to the weak pound.

Bank Governor Mark Carney said households are suffering a delayed hit from Brexit as they cut back on spending in the face of surging inflation from the weak pound, having initially shrugged off the vote and its implications.

Business investment has also been reined in markedly due to uncertainty, he said.

He warned that the assumption of a smooth transition under Brexit would be "tested" over the next two years.

"If UK households and businesses look through the flurry of headlines, then the economy can be expected to pick up from its current period of sluggishness."

But Mr Carney suggested that a pick up in growth would likely pave the way for a rate rise.

"Even a limited pick up in growth is likely to have consequences for the stance of monetary policy."

The MPC has said it is willing to tolerate higher inflation to support the economy, but is becoming less patient with rising prices.

Mr Carney said growth "doesn't have to pick up much to focus the attention of the committee".

He said the Bank believes households and the wider economy could withstand a rate hike, "if appropriate".

Press Association

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