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The Actuary The magazine of the Institute & Faculty of Actuaries
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BoE upgrades economy growth forecast to 2% for 2017

The Bank of England’s (BoE) Monetary Policy Committee (MPC) expects the UK economy to grow 2% this year, up from its 1.4% November forecast and 0.8% projection in August last year.

02 FEB 2017 | CHRIS SEEKINGS
Upgrade reflects 'surprisingly resilient economy' ©Shutterstock
Upgrade reflects 'surprisingly resilient economy' ©Shutterstock

It said the upgraded outlook reflects the chancellor’s announcement of more spending and investment in the autumn statement, firmer momentum in global activity, supportive credit conditions and few signs of a slowdown in consumer spending.

As expected, interest rates were kept on hold at 0.25%, although with inflation expected to peak at 2.8% in 2017, the bank refused to rule out any possible rate increases later this year.

Hargreaves Lansdown senior economist, Ben Brettell, said: “The Bank of England faces a tough job in the coming months as it seeks to balance a surprisingly resilient economy, higher inflation and the difficult-to-quantify risks posed by Brexit.

“Unsurprisingly interest rates were left on hold, but the minutes noted that some MPC members were getting a little closer to the limits of their tolerance for higher inflation.

“This could mean we see the first interest rate rise in more than a decade at some point this year, particularly if wage growth turns out stronger than expected.”

UK GDP grew by 0.6% in the final quarter of last year, with retail sales 5.9% higher than a year earlier, and unemployment at an 11-year low.

However, with the depreciation in value of the pound, consumer price inflation saw its biggest rise since July 2014, leading Brettell to believe the BoE is unlikely to increase the costs of borrowing money in 2017.

He continued: “The most likely scenario is that higher inflation and weaker pay growth will squeeze household budgets, meaning consumer spending is likely to slow in real terms.

“The bank is unlikely to take the risk of raising borrowing costs in this environment. If it does happen, I would expect interest rates to remain at their previous low of 0.5% for some significant time afterwards.”