Friday 20 July 2018

Sterling slumps as Bank of England cuts growth forecasts

Bank governor Mark Carney
Bank governor Mark Carney
Colm Kelpie

Colm Kelpie

The Bank of England has cut its growth forecast for this year and 2018 on the back of Brexit, warning the UK economy will remain "sluggish".

The announcement knocked the sterling/euro rate above 90 pence for the first time this year.

It also cut its forecasts for wages and kept interest rates on hold at a record low, presenting a gloomy assessment that led analysts to believe the bank may be further away than expected from a rate hike.

The speed limit of the economy has slowed, Bank of England governor Mark Carney said, with uncertainty around Brexit being blamed.

That had a knock-on effect on sterling.

The pound sank to a nine month low against the euro and tipped above the 90 pence mark, which if sustained would be bad news for Irish exporters.

John Moclair, head of global customer group at Bank of Ireland capital markets, said the euro/sterling exchange rate began the year at around 85p but has crept higher over the past few months and is now trading above 90p. "This brings the move in 2017 to a 6pc weakening of the pound versus the single currency," Mr Moclair said.

"This latest move in the exchange rate also highlights one of the dominant themes in currency markets in 2017 so far, namely the relentless strengthening of the euro against the currencies of all its major trading partners.

"This uptrend in the single currency has been driven mainly by a change in rhetoric from ECB governor Mario Draghi," Mr Moclair added.

He said Mr Draghi "has recently begun to talk up the chances of an economic recovery in the Eurozone and of possible tightening of monetary policy in the future - and has led to an overall 15pc gain in the value of the euro versus the US dollar and an 8.5pc rise on a trade weighted basis so far this year".

Mr Carney said uncertainty about Brexit - in particular lower investment by companies - meant the British economy could not grow as fast as before without pushing up inflation. It is already rising at 2.6pc.

The bank said it now expects the UK economy to grow by 1.7pc this year, down from its May forecast of 1.9pc.

It also shaved its growth forecast for next year to 1.6pc from 1.7pc, but kept 2019 at 1.8pc.

It comes just a day after a more upbeat assessment from the UK think tank the National Economic and Social Research Institute which said the pace of growth in the UK economy would speed up next year.

Irish Independent

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