Economy

Bank of England keeps interest rates on hold but lowers growth forecast

Bank of England keeps interest rates on hold but lowers growth forecast

At the press conference that followed the BoE's policy announcement, Governor Mark Carney blamed the slowdown in consumption on the wage squeeze that's being felt by British households as a result of the higher inflation brought on by sterling's depreciation since the Brexit referendum.

As with March's monetary policy decision, policymakers were split 7-1 in favour of keeping Britain's interest rate at its record-low of 0.25%.

In October past year, the Bank of England warned that life would turn hard for Britain's most vulnerable, as inflation was expected to rise due to a slump in the pound following the vote to exit the EU.

CPI inflation rose to 2.3% in March, and the MPC expects it to rise further above the target 2% in the coming months, peaking just below 3% in the fourth quarter of this year.

The Bank's two previous sets of quarterly forecasts brought big upward revisions to the growth outlook and on Thursday it only softened its short-term outlook a fraction, despite recent data showing that growth is now slowing sharply.

Looking to reassure British consumers, Carney noted that the bank does not expect that slowdown to continue for a substantial period, arguing that the downward pressures on wage growth are unlikely to hang around long.

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Minutes of the rates meeting showed seven MPC members voted to keep rates unchanged, while outgoing policymaker Kristin Forbes remained the sole dissenter, repeating her call for a rise to 0.5%.

The pound is now trading down 0.57 percent against the dollar and 0.39 percent against the Euro (1320GMT).

The report also said that exports and business investment could pick up more than expected this year, helping offset any weakness in the consumer sector.

The Bank of England has trimmed its 2017 GDP growth forecast from 2.0% to 1.9%, slightly lifted the GDP growth projection for 2018 and 2019 to 1.7% and 1.8%, respectively.

The bank warned that living standards will fall this year as the headwinds from Brexit mount.

"Note that the MPC stated that interest rates may need to rise by a "somewhat greater extent than implied by markets" - the forecasts are based on rates rising in Q4 2019, although markets have pulled their expectations forwards to Q1 2019 in recent days".

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Policymakers also noted that monetary policy could not prevent "the necessary real adjustment as the United Kingdom moves towards its new global trading arrangements".

Since the Brexit vote in June, the pound has fallen as much as a fifth in currency markets, pushing up inflation in Britain.

Earlier on Thursday, data showing weaker-than-expected industrial output and a widening of Britain's trade gap also weighed on sterling, which has struggled to break past the "psychological" US$1.30 mark this week.

It said: 'In the MPC's latest projections there is such a trade-off through most of the forecast period, with a degree of spare capacity and inflation remaining above the 2% target.

This week's biggest United Kingdom economic news was the Bank of England (BoE)'s May policy decision.

'The Committee attempted to push back at the current bearishness of the markets, which do not appear to expect any rate hike until the turn of the decade'.

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