January 21, 2018

Brexit to make families poorer: Bank of England

17 May 2017, 02:53 | Frank Carlson

Mark Carney is expected to leave interest rates on hold and quantitative easing unchangedKIRSTY WIGGLESWORTH REUTERS

Mark Carney is expected to leave interest rates on hold and quantitative easing unchangedKIRSTY WIGGLESWORTH  REUTERS

"It is possible that some of the recent weakness is a effect of companies' uncertainty about the outlook, with some unwilling to raise wages at a faster pace until they have more clarity about their future costs and markets", the Bank said.

And at his press conference the Bank's Governor Mark Carney said some of the weakness in wages could be due to firms' uncertainty about the future trade outlook outside the European Union, causing them to offer "more modest pay settlements".

The BoE has edged down its GDP forecast for the United Kingdom this year to 1.9 per cent from 2 per cent, but raised it by 0.1 percentage points in 2018 and 2019.

The Bank also said its view was conditioned on a "smooth" Brexit process.

In the minutes to Thursday's decision, the bank said that if the economy performs as expected, its interest rates may be raised "by a somewhat greater extent" than is now expected in financial markets.

But Mr Carney warned that improving fortunes were based on a "smooth" adjustment when it came to European Union withdrawal that would see a transition period to avoid a cliff edge departure.

Data published on Thursday showed industrial production disappointed in the first quarter, and little boost for exporters from the fall in the pound since the Brexit vote.

"Monetary policy could need to be tightened by a somewhat greater extent over the forecast period than the very gently rising path implied by the market yield curve underlying the May projections", the Bank of England said today.

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The nine members of the Bank's Monetary Policy Committee voted unanimously to keep interest rates at the record low of 0.25%.

The Bank said weakening consumer spending growth would lead to lower GDP growth, although higher exports and business investment should offset some of that slowdown.

Sterling, earlier trading at $1.2920, fell to $1.2872 after the decision.

Inflation forecasts have also been mildly adjusted with the BOE bringing forward its expectations for consumer price inflation (CPI) to peak over the forecast period in the final quarter of this year at around 2.8 percent, as opposed to its earlier estimate that the highest point would be reached in the second quarter of 2018.

The much-awaited BoE interest rate decision resulted in the predicted freeze at 0.25%.

Financial markets are now pricing in two Bank of England rate rises by 2020, up from one when the Bank finalised its latest Inflation Report projections last week.

The small downgrade comes after a first quarter in which slower consumption put a brake on growth, with a weak 0.3 per cent quarterly expansion that surprised many economists.

"The focus now is really on the Bank of England, and maybe that could be an explanation (for sterling strength)", said Richard Falkenhall, currency strategist with SEB, noting policymaker Kristin Forbes' vote for a rate hike in March and the possibility that other members of the Bank's rate-setting committee could follow suit. The BoE noted that recent sterling gains would lower import prices and dampen upward pressure on inflation, which in turn should ease the inflation-adjusted squeeze on household incomes.

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