Sterling gloom as Bank of England downgrades growth forecast

Dianna Christensen
August 6, 2017

Tenreyro voted with Governor Mark Carney to maintain interest rates, leaving Ian McCafferty and Michael Saunders as the two dissenters. The growth outlook is subdued and it is hard to see domestic price pressure building to any vital extent despite the low jobless rate. Some will point to this as evidence that Brexit is taking its toll on the United Kingdom economy. "This overshoot reflects entirely the effects of the referendum-related falls in sterling".

Although the central bank kept policy unchanged on 15 June, three MPC members voted to hike interest rates.

On Thursday, the Bank said it saw GDP growth of 1.7 per cent this year, down from the 1.9 per cent it projected in May. Three months ago, the Bank expected GDP to rise by 1.9 percent in 2017, 1.7 percent in 2018 and 1.8 percent in 2019.

In addition, it has chose 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.

Ishaan Malhi, CEO and founder of online mortgage broker Trussle, agrees that the Bank of England's decision to hold interest rates has "direct implications for every household, positive and negative".

The Bank also increased the total amount of cash it is planning to print to support the economy from £545bn to £560bn.

The BOE's stance-after holding its benchmark interest rate steady at 0.25%-was interpreted as dovish by investors, causing a 0.8% slide in the pound to $1.3119 and a fall in gilt yields.

Governor Mark Carney said at a press conference at the BOE's headquarters in London that the British economy was "beginning the process of adjusting to a new and as of yet uncertain economic relationship with the European Union".

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Significantly, he added that Bank was not excessively concerned about the level of British households' debt, as the ratio of consumer credit to incomes continued to be much lower than before the financial crisis.

Inflation had surged as high as 2.9% in April and May, but moderated in June, dropping to 2.6%.

The British bank rate has been at 0.25 percent since August past year, a record low set with a 25 basis point cut to bolster the economy in case of blowback from the Brexit referendum decision.

"While importers are still suffering the headache of higher foreign supplier and equipment costs, if the economy improves further in the second half of this year we could see a stronger pound, as the Bank warned that tightening may be required to bring inflation back down to target".

At the time of writing this article, the Pound to Euro exchange rate trended in the region of 1.1188.

At the end of June he sounded concerned about inflation and said the bank would tolerate above target inflation over the long term.

The MPC says it expects inflation to rise in the next few months, peaking at around 3% in October.

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