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Principale » Bank warns of 'moderate' growth as it keeps interest rates at 0.25%

Bank warns of 'moderate' growth as it keeps interest rates at 0.25%

13 Mai 2017

The Bank of England expects wages to start picking up in 2018 and inflation to ease back down - but only assuming Britain gets a new trade deal with the EU.

In its latest Inflation Report, the central bank has upped is projections for CPI in 2017, after inflation jumped above its target to 2.3% in February and March.

Although the Bank expects United Kingdom growth in 2017 to be slightly lower than previously expected at 1.9% (down from 2%), its projections for 2018 and 2019 have been raised by 0.1 percentage point to 1.7% and 1.8%, respectively.

The sterling dropped below the $1.29 mark against the dollar to trade at $1.2888, against the euro it fell 0.4 per cent to 1.1855 euros.

"However, the risk is that if growth is only slightly revised (by one or two tenths), and limitedly to this year, the message would continue to be that growth remains rather robust in any case, and despite the risks posed by Brexit", said Intesa in a note to clients.

"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.

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Monetary policy committee (MPC) members voted 7-1 to hold rates at a record low of 0.25%, in a widely expected move.

With only a month until a national election, the bank said the short-term squeeze on households from inflation since June's Brexit vote would be more severe than it predicted in February, with price growth peaking at over 2.8 per cent late this year.

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"There's a lot resting on the assumption that the sustainability of growth and pick-up in wages will be aided by a smooth Brexit", said Tim Graf, head of European macro strategy at State Street Global Markets.

Interest rates are set by the Bank's Monetary Policy Committee (MPC), which is tasked with keeping inflation at 2%.

The Bank kept leading interest rates unchanged and stimulus measures in place, but also crimped its economic growth forecasts.

Echoing language from the last policy meeting in March, the bank said it would not take much upside news on growth and inflation for some other members of the MPC to join Forbes.

But there is one huge caveat: the forecast presented by the Bank of England on Thursday depends on Britain's "smooth" exit from the European Union - one that includes a future agreement on trade, or a transition period.

On Thursday, the policymakers erred on the side of caution, particularly after official figures showed economic growth more than halved to 0.3 percent in the first quarter compared with the previous three months.

It trimmed its forecast for growth this year to 1.9 percent from two percent, but nudged up forecasts for 2018 and 2019 to 1.7 percent and 1.8 percent.

Even if there is eventually a smooth Brexit process - which is obviously questionable - we suspect that the twists and turns in getting there will cause serious uncertainties that hamper business investment and very possibly willingness to employ.

Bank warns of 'moderate' growth as it keeps interest rates at 0.25%