Bank of England Says Smooth Brexit Could Mean Faster Rate Increases

The Bank of England is expected to nudge down its growth outlook and keep interest rates on hold

The Bank of England sent a mixed message on the future pace of interest rate rises on Thursday ahead of next month's general election, with a modest downgrade of its 2017 growth forecast and a majority vote to keep rates this month on hold at 0.25 per cent.

The steady outlook for growth contrasts with a sharp slowdown in the official measure of growth seen at the start of this year, when the economy expanded just 0.3 per cent on the quarter - less than half its rate at the end of last year.

The Bank of England has warned the squeeze from Brexit-fuelled inflation on household income has started and said growth would remain "moderate" after faltering at the beginning of the year.

The pound recently jumped to higher levels, on the backdrop of the announcement of a snap election in the UK.

The Bank of England said on Thursday that it may need to raise interest rates before the late 2019 date that markets had been expecting, assuming Britain can leave the European Union smoothly in two years' time. But it lowered its forecast for 2017 from 2.0% to 1.9%.

The Bank also expects inflation will be higher than previously expected; peaking at 2.8% this autumn.

The BoE also warned that it might have to raise interest rates faster than the market thinks. ING economist James Smith commented that, despite some hawkish sentiments from Mr Carney, he still did not expect an interest rate hike before Brexit talks conclude in 2019. The increased cost of importing products into the United Kingdom is the main factor pushing up CPI, which the Bank now expects to reach 2.8% at the end of 2017, slightly higher than the February forecast of 2.7%. The Bank of England (BoE) trimmed its forecast of growth this year to 1.9 percent from 2.0 percent, but nudged up its forecasts for 2018 and 2019 to 1.7 percent and 1.8 percent.




Latest forecasts from the National Institute of Economic and Social Research predict inflation will peak at 3.4% in the final quarter of 2017, although it said the Bank would "look through" this and likely keep rates on hold for another two years. Monetary policy can not prevent either the necessary real adjustment as the United Kingdom moves towards its new global trading arrangements or the weaker real income growth that is likely to accompany that adjustment over the next few years.

The Reuters poll, however, suggests Forbes will remain in her minority of one, resulting in a 7-1 vote in favour of keeping rates at their record low.

The Governor of the BOE says that his organization has not modeled a disorderly Brexit.

However, despite the solid vote for no change on the cost of borrowing, the minutes of the meeting relayed that "some members" still thought that it would take "relatively little further upside news" on the inflation outlook for them to support a monetary tightening.

Inflation has been forecast up by the Bank, and is now predicted to peak at nearly three per cent this year, up from 2.8 per cent previously predicted.

Governor, Mark Carney, told reporters: "With wage growth moderating and inflation picking up, both household spending and GDP growth have slowed markedly".

Inflation is now running at 2.3 percent, above the bank's target rate of 2.0 percent, raising the possibility that the bank could lift rates to dampen rising prices.

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