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BoE Forecasts Growth, Scraps Rate Cut Plan

Mark CarneyMark Carney

The Bank of England scrapped its plan to cut interest rates, which it said could now move up or down, and raised its forecasts for 2017 growth and inflation sharply due to the slide in sterling since Britain’s vote to leave the EU.

The battered pound rose and British government bond prices fell after the BoE shifted to what Governor Mark Carney called “a neutral stance” on what its next move would be, Reuters reported.

The bank, which has faced political criticism for it’s near-zero rates, rethought its view on when Britain’s economy will feel the pain of June’s decision to leave the European Union.

In a set of forecasts on Thursday, it largely reversed its previous prediction of a major hit to growth next year which it now saw at 1.4%, up from an estimate of 0.8% made in August. That represented its biggest ever growth upgrade.

But it warned that Britain’s access to EU markets could be “materially reduced”, which would hurt growth over “a protracted period” and forecast a slower recovery for 2018 and 2019 as significantly above-target inflation squeezed living standards.

The BoE responded to the Brexit vote by cutting rates to a record low of 0.25% in August and reviving its bond-buying plan. It also said then that another rate cut was likely in 2016 if the economy slowed as it expected.

Critics, many of them Brexit supporters, accused Carney and his fellow policymakers of overstating the risks to the economy.

Asked by reporters about the big change to the 2017 growth forecast, Carney said in “broad-brush” terms the BoE was sticking to its view of the economy in three years’ time.

 Record Inflation Overshoot

The Bank said it now expected a record overshoot of inflation above its target over the next two to three years, peaking above 2.8% in early 2018, because of sterling’s recent fall to a 31-year low against the US dollar.

“There are limits to the extent to which above-target inflation can be tolerated,” the BoE’s Monetary Policy Committee said as it forecast inflation would jump to 2.7% this time next year, nearly triple its current level.

“Monetary policy can respond, in either direction, to changes in the economic outlook as they unfold to ensure a sustainable return of inflation to the 2% target.”

Inflation was only expected to return to 2% in 2020.

But economists doubted the bank would raise rates soon. “We don’t think there is any material probability of a bank rate hike in the foreseeable future,” RBC’s Sam Hill said.

 

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