Bank of England, staying
on hold, hints again at 2018 rise
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[August 03, 2017]
By William Schomberg and David Milliken
LONDON (Reuters) - The Bank of England kept
interest rates at a record low once again on Thursday and trimmed its
forecasts for economic growth both this year and next.
It saw the impact of Brexit -- Britain's leaving the European Union --
weighing on households' spending power.
The BoE said it now expects Britain's economy to grow by 1.7 percent
this year, down from its May forecast of 1.9 percent. It also shaved its
growth forecast for next year to 1.6 percent from 1.7 percent, but kept
2019 at 1.8 percent.
BoE Governor Mark Carney and his top officials reiterated their message
to financial markets that they might raise borrowing costs by a bit more
than investors expect over the next three years, possibly within a year.
But the pound fell by about half a cent against the U.S. dollar while
shares and British government bond prices jumped as investors took the
message from the BoE as a sign that it was in no hurry to raise interest
"The door is still open to a hike, but it doesn't look imminent," Alan
Clarke, a rate strategist with Scotiabank said.
"It was more dovish than we had feared. The most striking thing is that
they have downgraded the outlook for wages despite lower-than-expected
unemployment, and the inflation profile is a bit lower, despite a weaker
pound," he said.
Faced with uncertainty about the impact of Brexit, the BoE said its
rate-setters voted 6-2 to keep Bank Rate at 0.25 percent, as expected by
most economists taking part in a Reuters poll.
The Bank also kept its asset purchase programs unchanged and said a bank
lending scheme would end as previously scheduled in February 2018.
A few weeks ago, investors had begun to price in the chance that the BoE
might raise interest rates for the first time in a decade this month.
The speculation was triggered by an unexpectedly close 5-3 vote at the
Monetary Policy Committee's last meeting in June when it kept rates on
Since then one of the dissenters, Kristin Forbes, has left the central
At the August meeting, Michael Saunders and Ian McCafferty voted again
for a 25 basis point increase in rates.
But BoE Chief Economist Andy Haldane, who said in June that he was
likely to back a rate hike in the second half of this year, decided to
keep borrowing costs on hold for now.
Reflecting its difficult balancing act -- with inflation above its 2
percent target while growth is slowing - the BoE repeated its message
that a rate hike was not off the table.
It said "monetary policy could need to be tightened by a somewhat
greater extent over the forecast period than the path implied by the
yield curve underlying the August projections," echoing its previous
language on rates.
[to top of second column]
Mark Carney, Governor of
the Bank of England attends the quarterly Inflation Report press
conference at the bank in London, Britain February 2, 2017. REUTERS/Kirsty
The BoE pointed to expectations in financial markets that rates could
start to rise in the third quarter of 2018.
The central bank's message on the economy was similar to the one it gave
The split on the MPC over what to do with interest rates highlights the
dilemma facing the central bank.
On the one hand, Britain has avoided the recession that many private
sector analysts predicted after the shock referendum decision in June
2016 to leave the European Union, and unemployment is at a four-decade
But at the same time, data has shown the economy had its slowest growth
since 2012 in the first half of this year and inflation, while still
above the 2 percent target, unexpectedly fell in June.
A series of surveys of Britain's manufacturing, construction and
services sectors published this week suggested the economy remained in a
low gear in July.
Furthermore, Brexit talks between London and Brussels have made little
progress, raising concerns that a messy departure from the bloc in 2019
could hammer the economy.
In response to painfully slow increases in pay this year, the Bank cut
its forecasts for wage growth in 2018 and 2019 to 3 and 3.25 percent,
down by half a percent for each year.
It blamed the downgrade on the uncertain outlook for the economy as
Brexit nears and Britain's stubbornly weak productivity.
The BoE lowered by a fraction its forecasts for inflation which it now
saw at just under 2.6 percent in a year's time after peaking at around 3
percent in October.
British inflation in June stood at 2.6 percent and the BoE's latest
forecasts see it remaining above its 2 percent target throughout its
three-year forecast period.
Helping to offset the squeeze on household spending power, exports were
seen growing a bit more strongly than in the BoE's May forecasts. But
investment was likely to be weaker than previously expected in 2018 and
For graphic click: http://tmsnrt.rs/2eSYykb
(Writing by William Schomberg Editing by Jeremy Gaunt.)
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