LDN - Business

Bank of England ups growth view, Brexit keeps rate rise on ice

[May 02, 2019] By David Milliken and Andy Bruce

LONDON (Reuters) - The Bank of England lifted its growth forecasts on Thursday but warned Brexit continued to cloud the outlook for Britain's economy and said there was little immediate risk from waiting for a clearer view before raising interest rates.

Policymakers voted unanimously to keep rates steady at 0.75 percent, as expected in a Reuters poll, but stuck to their view that higher borrowing costs would be needed in future - a more hawkish stance than either the U.S. Federal Reserve or the European Central Bank.

The BoE upgraded its forecast for growth in the world's fifth-largest economy to 1.5 percent, up from the decade-low 1.2 percent it predicted in February, largely reflecting better global economic prospects.

"The underlying path of GDP growth appears to be slightly stronger than previously anticipated, but marginally below potential," the BoE said.

Sterling briefly rallied after the BoE announcement, before settling slightly lower, while futures markets priced in a marginally lower chance of an interest rate rise.

"With the announcement of a further and longer extension to the Brexit deadline since the Bank last met, there was some suggestion that this would allow for a more hawkish approach. But this hasn't really transpired," said David Cheetham, chief market analyst at currency brokers XTB.

During the first quarter of 2019 the economy probably grew by 0.5 percent due to businesses building up stocks ahead of Brexit, the BoE said - a faster rate than the 0.2 percent growth it forecast in February. However, the central bank expects growth to slow to 0.2 percent during the current quarter.

Britain's departure from the EU, originally due for March 29, was delayed last month until Oct. 31, unless parliament approves a deal sooner.

This removes the immediate risk of a disruptive, no-deal Brexit which hung over the BoE at its last meeting in March, but extends a period of economic uncertainty.

The BoE said this made some economic data, such as business surveys, harder than normal to interpret.

"More generally, there remained mixed signals from indicators of domestically generated inflation and the cost of waiting for further information was relatively low," the BoE said, adding it continued to assume Brexit would go smoothly.

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The Bank of England (L) and Royal Exchange building (R) in the City of London, Britain, January 25, 2018. REUTERS/Toby Melville/File Photo

British inflation is currently just below its 2 percent target, but unemployment is at its lowest in more than 40 years while wages are rising at their fastest rate in a decade.

Before Thursday's decision, economists polled by Reuters on average expected rates to stay on hold until early next year - when Governor Mark Carney hands over to a new successor - and financial markets saw only a 35 percent chance of a rise this year.

The BoE has raised interest rates only twice since the 2008 financial crisis, in November 2017 and August last year.

"The Committee continues to judge that ... an ongoing tightening of monetary policy over the forecast period, at a gradual pace and to a limited extent, would be appropriate," the BoE said, echoing earlier language.

The BoE's tightening stance contrasts with the position of the U.S. Federal Reserve, which on Wednesday said it saw no case for moving rates in either direction, and faces pressure to lower interest rates from President Donald Trump.

Updated BoE forecasts show the central bank expects inflation - currently 1.9 percent - to exceed its 2 percent target in two and three years' time, by a similar margin to what it predicted in February.

The forecasts are based on financial market pricing which assumed BoE interest rates would not reach 1 percent until late 2021 - around 15 basis points less in tightening than was priced in just before February's BoE meeting.

The BoE said that after three years, the economy would be overheating to a greater extent than it forecast in February if interest rates only rose to 1 percent, and that inflation would be higher if sterling had not recently strengthened.

It also cut its forecast for unemployment sharply to 3.7 percent in two years' time, down from 4.1 percent in February, reflecting businesses' preference to hire staff, rather than make long-term investments, at a time of economic uncertainty.

(Additional reporting by Tommy Wilkes; Editing by Toby Chopra)

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