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07

Bank of England downgrades growth expectations

Open-access content Thursday 3rd August 2017

The Bank of England (BoE) has downgraded its forecast for UK economic growth for 2017 from 1.9% to 1.7%, following a disappointing first half to the year.

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In addition, it has decided to keep interest rates on hold at 0.25% after consumer price inflation fell unexpectedly from 2.9% in May to 2.6% in June.

However, it said it expects inflation to rise further in the coming months, and to peak at around 3% in October, with the past depreciation of sterling continuing to pass through to consumer prices.

"The UK economy is faltering and consumer purses are under pressure, so it's no surprise the BoE has decided not to upset the applecart by raising interest rates," Hargreaves Lansdown senior analyst, Laith Khalaf, said.

"It has also downgraded its growth forecasts for 2017, on the back of a pretty disappointing first half of the year. Some will point to this as evidence that Brexit is taking its toll on the UK economy.

"While the last two quarters have certainly seen a dip in growth, overall economic performance has been better than expected since the referendum, particularly in light of some of the dire forecasts that preceded the vote."

The bank said that its projections are conditioned on the average of a range of possible outcomes for the UK's eventual trading relationship with the EU, with the pound falling one cent against the dollar after today's forecast.

However, they also assume that, in the interim, households and companies base their decisions on the expectation of a smooth adjustment to that new trading relationship.

The bank's Monetary Policy Committee (MPC) voted 6-2 in favour of keeping the interest rates unchanged, compared with a 5-3 decision in the previous vote, with hikes now not expected in the short term.

"Looking forward, the MPC will maintain its hawkish bias to encourage the market to dampen inflation expectations on its behalf," State Street Global Advisors investment manager, Alan Wilson, said.

"It is very unlikely this signaling will culminate in formal policy action, particularly in the early stages of the Brexit process. 

"Learning lessons from the European Central Bank, the MPC will continue to tread lightly and resist the temptation of tightening amid transitory inflation pressure."


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This article appeared in our July 2017 issue of The Actuary.
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