Thursday, 02 May, 2019
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2019-05-02 11:00:03.442 GMT
By David Goodman and Lucy Meakin
(Bloomberg) — The Bank of England signaled that the market
is slightly underpricing the outlook for interest-rate increases
over the next three years as long as Brexit goes smoothly.
Officials said the inflation rate will be above the 2
percent target and rising in 2021 if the central bank, led by
Governor Mark Carney, only delivers one more quarter-point hike
between now and then, as investors currently expect.
In an upbeat set of forecasts, policy makers upgraded their
expectations for growth, and said unemployment will fall further
and the economy will generate more excess demand than previously
predicted. Still, the minutes of the meeting indicated no rush
to hike immediately, with a unanimous vote to hold rates defying
some predictions for a split on the Monetary Policy Committee.
“There remained mixed signals from indicators of
domestically generated inflation and the cost of waiting for
further information was relatively low,” the minutes of the
meeting said. At the same time, “an ongoing tightening of
monetary policy over the forecast period, at a gradual pace and
to a limited extent, would be appropriate.”
The bank's new forecasts are the first since the deadline
for the U.K. to leave the European Union was extended to
October. The economy has been hobbled by the uncertainty around
Brexit, leading to a year of falling investment, and the minutes
said the timing and nature of Brexit remained the biggest factor
for the outlook.
Still, policy makers assume a smooth transition, and the
forecasts weren't materially affected by the delay to the exit
date. U.K. economic data in the short term may be volatile and
difficult to interpret because of Brexit, the bank said.
Agents reported that Brexit is pushing down already weak
business investment intentions. Investment will probably fall
for a few more quarters, but the bank raised its forecast for
investment growth through 2021.
The vote was 9-0 to hold at 0.75 percent and to keep the
asset purchase program unchanged. All 62 economists in a
Bloomberg survey correctly predicted Thursday's decision.
The forecast for GDP expansion this year was lifted to 1.5
percent from 1.2 percent because of a stronger first-quarter
performance as companies stockpiled for Brexit. Officials now
see the economy expanding 0.5 percent at the start of the year,
up from 0.3 percent in March, with inventory building adding
about 0.1 percentage point.
The growth predictions for 2020 and 2021 also went up,
though that was due more to looser global financial conditions
and the lower yield curve in the U.K. Unemployment, already at
the lowest in four decades, will fall further, although wage
gains appear to be levelling off, the bank said.
The BOE's slightly hawkish tone sets it apart from many of
the world’s biggest central banks. The Federal Reserve on
Wednesday left rates on hold and said the next move could be a
hike or a cut. The European Central Bank will offer new loans to
help banks. The Bank of Japan last month reinforced a promise to
keep rates at rock bottom.
The BOE lowered forecasts for inflation this year but kept
them unchanged for two years out. The change was based on lower
energy prices and a higher pound, not a different judgment on
domestically generated inflation, the bank said.
Before the report, investors didn’t see the next BOE hike
until well into next year, with overnight index swaps not fully
pricing in a move until beyond September 2020.
To contact the editors responsible for this story:
Paul Gordon at email@example.com