Bank of England hikes UK economic growth forecast from 1.4% to 2.0% as Brexit blues fail to materialise
The Bank has actually likewise enhanced its projections for 2018 and also 2019, with financial development anticipated ahead in at 1.6 percent as well as 1.7 percent specifically.
The UK economy will certainly expand considerably faster compared to devalued projections following last June’s EU vote, the Bank of England confessed today.
As it held rates of interest at 0.25 percent, the Bank increased its development projection for 2017 to 2 percent – well up from November’s price quote of 1.4 percent.
The upgrades will certainly humiliate the bank as they reveal as unneeded its alarming cautions of serious financial damages from the Brexit ballot.
In August, the Bank cut interest rates for the first time since 2009, when they were reduced to 0.5 per cent in the heat of the financial crisis.
The Bank said a more gradual slowdown in consumer spending, measures announced by the Chancellor in the Autumn Statement, and stronger outlook for the global economy would all support UK output over the next few years.
On what’s been dubbed ‘Super Thursday’, the Bank of England also said its inflation forecast remains broadly unchanged for this year, at around 2.7 per cent.
The Bank said the weaker pound would lead inflation to rise to 2.8 per cent in the first half of 2018 and fall back ‘gradually’ to 2.4 per cent in three years time.
It added: ‘The value of sterling remains 18% below its peak in November 2015, reflecting investors’ perceptions that a lower real exchange rate will be required following the UK’s withdrawal from the EU.
‘Over the next few years, a consequence of weaker sterling is that the higher imported costs resulting from it will boost consumer prices and cause inflation to overshoot the 2% target.’
Consumer price inflation rose to a two-year-high of 1.6 per cent in December, primarily because of a slump in value of the pound, which has lost over 14 per cent of its value since June’s referendum.
On the back of the Bank’s report, sterling is down 0.36 per cent to $1.2610, after reaching a seven-week high against the dollar this morning.
Against the euro, sterling is down 0.80 per cent to €1.1664.
Neil Wilson, a senior market analyst at ETX Capital, said: ‘Despite the upgrade to growth, the market sees this as a bit doveish as inflation is not expected to run away as much as thought and we are seeing sterling hand back earlier gains.’
He added that the upgrade was ‘a touch of humble pie for the Bank, as it’s been made abundantly clear that the economic Armageddon it expected in the event of Brexit has just not materialised.
‘The UK remains the fastest growing G7 economy – not bad for a nation that some think has committed an act of self-mutilation in choosing to leave the EU.’
The FTSE 100 is up 0.33 per cent or 23.68 points to 7,131.33.
Minutes of the Bank’s Monetary Policy Committee showed some policymakers believe it is becoming harder to justify keeping rates at record lows, with growth showing surprising resilience and inflation rising.
The Bank said: ‘The more time that passed without a noticeable reduction in economic growth, the more difficult it would become to tolerate the extent of the inflation overshoot.’
Financial markets are factoring in a rate rise in 2018 and for borrowing costs to be hiked twice over the next three years, although economists are not expecting an increase until 2019.
The Bank said it would continue to balance the trade-off between higher inflation and growth in ‘such exceptional circumstances’ and cautioned that the consumer spending spree boosting the economy is set to come to an end, which would weigh on growth.
It said a consumer spending slowdown is ‘highly likely given the scale of the depreciation of sterling and the consequent effect that higher import prices would have on real income growth.’
Tom Stevenson, investment director for personal investing at Fidelity International, said: ‘With the Old Lady of Threadneedle Street prepared to keep sitting on its hands when it comes to raising rates and with inflation expected to breach the central bank’s 2% target this year, anyone with savings still sitting in cash will struggle to generate real returns.
‘One alternative is to look to the stock market. History shows there has been a sweet spot in the inflation range that suits equities well – normally at around 2% to 2.5%.
‘Shares tend to perform particularly well if the rise in inflation reflects higher growth expectations rather than a wage spiral. This is the Goldilocks scenario for equities and it may well apply for much of this year and next.’
Suren Thiru, Head of Economics at the British Chambers of Commerce, said: ‘The Bank of England’s latest forecasts paint a much more optimistic picture of the UK’s growth prospects compared to their previous post-EU referendum predictions.
‘Although the central bank is slightly less concerned over price growth, inflation is still expected to breach the 2% target for a prolonged period. This means that MPC’s attempts to combat rising inflation and support growth is likely to remain a challenging balancing act through the forecast period.’
Meanwhile, Yael Selfin, KPMG Chief Economist said: ‘Less pressure on the pound, as the focus of markets’ attention turns elsewhere, is providing a backstop for any further deterioration in the inflation outlook.
‘Given the volatility expected in the first half of 2019, as the UK exits the EU, we could see rates beginning to rise later than markets are currently indicating.
‘The MPC may decide to start its tightening cycle only after the UK is safely out of the EU, despite a short to medium term peak in inflation above the MPC target of 2%.’
The latest forecasts come after the Bank’s chief economist Andy Haldane admitted last month the Bank had suffered a ‘Michael Fish moment’ in making overly gloomy predictions last year over the impact of a Brexit vote.
The Bank’s Canadian Governor Mark Carney controversially warned that a Brexit vote could trigger a UK recession ahead of last June’s referendum.
In August, less than two months after the EU referendum, the Bank downgraded its UK annual growth forecasts for 2017 from 2.3 per cent to just 0.8 per cent.
But, in November, the Bank raised its forecast to 1.4 per cent after data showed the economy hadn’t weakened as it feared.
The UK’s economy grew by 2 per cent last year, with growth of 0.6 per cent in each of the last three quarters.
Today, the construction purchasing managers’ index hit a five-month low of 52.2 in January after December’s nine-month high of 54.2, a steeper decline than forecast in a Reuters poll, though still indicating modest growth.
The latest PMI reading for the key services sector, which accounts for almost 80 per cent of the UK economy, has shown five consecutive months of growth, and unemployment also has remained at an 11-year low.
On Wednesday, figures from Markit revealed the UK manufacturing sector showed signs of a ‘strong start’ last month, but remains under pressures as the cost of imports rise.
source here: thisismoney.co.uk