Bank of England raises growth forecasts but flags concern over inflation
- Credit: PA
The Bank of England has lifted its growth forecasts for the next three years as Government spending looks set to help the economy continue defying Brexit slowdown fears.
Minutes of the latest Monetary Policy Committee (MPC) decision showed policymakers voted unanimously to keep rates on hold at 0.25% as the bank made sweeping upgrades to its growth outlook.
But rate-setters warned a consumer spending slowdown was still on the cards as soaring inflation caused by the weak pound and poor wage growth will see household income stall over the next two years.
In its quarterly inflation report, the bank upped its forecast for gross domestic product (GDP) to rise by 2% this year, 1.6% in 2018 and 1.7% in 2019. This is up from its November predictions for 1.4% growth in 2017, 1.5% in 2018 and 1.6% in 2019.
It comes after impressive growth of 0.6% in the final quarter of 2016 as GDP has remained surprisingly resilient since the Brexit vote last June.
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The bank, which has now raised its growth outlook twice in the last three months, said the “most significant” reason for the upgrades was the Government spending boost revealed in the Chancellor’s Autumn Statement last November.
It added that a solid global economy, surging stock markets and cheap borrowing were also helping support growth.
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Minutes of the MPC meeting 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.”
It is forecasting inflation to hit 2.8% in the first half of next year, before falling back to 2.4% in three years.
Some of the nine MPC members believe they are edging closer to the Bank’s limit in “looking through” above-target inflation.
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”.
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.
Governor Mark Carney controversially warned that a Brexit vote could trigger a UK recession ahead of last June’s referendum.
It halved rates to 0.25% and unleashed a mammoth economy-boosting package in August to see off the threat of an expected sharp slowdown.