Wednesday, 13 May, 2015

BOE Cuts Growth Forecast, Sees Inflation at Goal in Two Years

(Bloomberg) — The Bank of England cut its growth forecasts through 2017 and endorsed investors’ view for gradual interest-rate increases that may not start until the middle of next year. In its quarterly Inflation Report, the BOE said that, based on the benchmark interest rate rising in line with the path implied by market yields, U.K. inflation will return to its 2 percent target within two years. It sees the economy expanding 2.5 percent this year, down from 2.9 percent in February. With inflation at zero, the report was accompanied by a letter from Governor Mark Carney explaining the deviation from the BOE’s goal. While Carney said the inflation rate may dip below zero in the coming months, there will be a pickup at the end of the year, and the Monetary Policy Committee “judges it more likely than not that bank rate will increase from its current level over the forecast period.” The BOE rate has been at a record-low 0.5 percent since March 2009 and markets have priced in increases to start mid-2016. The report from the central bank is the first since Prime Minister David Cameron clinched a surprise majority victory in the May 7 general election. It also follows an official estimate of gross domestic product that showed growth unexpectedly slowed to 0.3 percent in the first quarter. The BOE expects GDP growth in January-March to be revised up to 0.5 percent and sees expansion of 0.7 percent this quarter. It lowered its 2016 projection to 2.6 percent from 2.9 percent and its 2017 outlook to 2.4 percent from 2.7 percent, though it said the outlook remains “solid.” The forecasts are based on the BOE rate rising to 1.4 percent by the second quarter of 2018. Inflation Outlook On inflation, it raised its 2015 forecast to 0.6 percent from 0.5 percent and cut the 2016 forecast to 1.6 percent from 1.8 percent. At the two and three-year policy horizons, it sees consumer-price growth at 2 percent and 2.1 percent respectively. The BOE said there is “little sign” of the U.K. slipping into deflation, though it is ready to cut the benchmark rate or restart asset purchases if needed. The central bank said there are “downside risks” to its near-term inflation forecasts. It also cited surveys of companies and employees showing they expect “little recovery in pay growth this year.” Data earlier on Wednesday showed annual pay growth of 1.9 percent in the first quarter. With inflation so low, Carney said real disposable incomes will rise the most since 2007 this year. Developments in the labor market are a key dividing point on the MPC, with some warning of potential pressures that may warrant early policy tightening. The BOE noted the differences, saying there is “considerable uncertainty” and a “wide range of views” around estimates of slack in the economy. The MPC’s central view has narrowed to about 0.5 percent of output. In the letter to Osborne, Carney said the weakness in U.K. inflation is being driven by external factors, particularly the sharp drop in oil prices. The governor is required to write such a letter when inflation strays more than a percentage point from 2 percent. “In the absence of further shocks, to return inflation to the target, it is necessary to eliminate the remaining degree of economic slack,” the governor said. Officials will return inflation to the target “as quickly as possible” after the impact of commodity-price drops fades. Disclaimer The information contained in this communication from the sender is confidential. It is intended solely for use by the recipient and others authorized to receive it. If you are not the recipient, you are hereby notified that any disclosure, copying, distribution or taking action in relation of the contents of this information is strictly prohibited and may be unlawful. This email has been scanned for viruses and malware, and may have been automatically archived by Mimecast Ltd, an innovator in Software as a Service (SaaS) for business. Providing a safer and more useful place for your human generated data. Specializing in; Security, archiving and compliance. To find out more visit the Mimecast website.