Bank of England holds, pushes back inflation and growth forecasts

The Bank of England delivered a bearish assessment of the UK economy on Thursday (February 4th), cutting its growth and inflation forecasts while leaving interest rates on hold at the record low of 0.5 per cent.

Members of the Bank’s Monetary Policy Committee voted 9-0 in favour of holding interest rates, with would-be hawk Ian McCafferty backing the consensus this time after voting for rates to rise by 25 basis points at each meeting since the middle of last year.

Amid slumping oil prices, the UK will take a lot longer to see inflation return close to the two per cent level that policymakers target.

“The scale of recent commodity price falls means that CPI inflation is likely to remain below 1% until the end of the year,” said the Bank. However, as the drag from energy and other imported goods unwind, the policymakers expect domestic cost pressures to build up enough to see inflation return to the two per cent mark within two years.

“This central projection for inflation is modestly below that of three months ago for much of the forecast period but broadly similar by the end,” explained the Bank, which warned that the risks to its central projection are “skewed to the downside”.

Growth stalls

In its inflation report, the Bank cut its growth forecast to 2.2 per cent, down from 2.5 per cent estimated three months ago. It also reined in its expectations for growth in 2017, down from 2.6 per cent to 2.3 per cent.

This comes after a mixed bag of economic reports on the UK’s manufacturing, construction and services industries this week.

While building activity and factory output disappointed in January, the services sector staged a surprise rebound, with Markit’s purchasing managers’ index climbing to its best in five months.

Chris Williamson, chief economist at Markit, said: “The economy defied expectations and picked up speed in January, but cracks continue to appear in the country’s resilience to the various headwinds.

“The three PMI surveys for January collectively point to a slight upturn in the rate of economic growth, consistent with GDP rising at a quarterly rate of 0.6% in the first quarter, up from 0.5% in the fourth quarter, if current levels are sustained. However, order book backlogs are already falling at the fastest rate for almost three years and companies have scaled back their hiring in response to growing uncertainty about the economic outlook at home and abroad.”

Sterling

Despite the dovish statement from the Bank, sterling continues on its upward trajectory versus the US dollar.

The pound has added four cents against the greenback this week, after touching on seven-year lows in January.

Dollar weakness has been seen lately amid concerns that the economic headwinds and tightening financial conditions will tempt the Federal Reserve to raise rates at a much slower pace than previously indicated.

GBP/USD was trading at just above the 1.46 handle following the Bank’s report - its highest level in almost a month.