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Principale » Sterling hits one-week low after BoE trims inflation forecasts

Sterling hits one-week low after BoE trims inflation forecasts

17 Mai 2017

With only a month until a national election, the BoE 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.

The sudden slowdown the BoE expected did not materialize but signs are growing that consumer spending is now wilting in the face of rising inflation, fueled partly by the pound's plunge following the Brexit vote. "The Bank expects inflation to peak a little below 3% in the fourth quarter".

Economic growth in the first quarter of this year was also weaker than expected, the BoE said.

The Bank said, while it expects first-quarter expansion to be revised higher to 0.4%, the economy would likely continue at a "similarly moderate pace of growth in the second quarter and beyond".

All policymakers except for Kristin Forbes voted for rates to be kept at their record low of 0.25 per cent.

Sterling, which was trading at $1.2938 earlier, fell to $1.2906 after the data, down almost 0.3 percent on the day. Against the euro, the pound was trading 0.3% down at 1.18 euro.

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.

Although the BoE said it might need to raise interest rates before the late 2019 date market pricing indicated, that was nine months later than its February forecasts showed.

As the Brexit vote's effect on the Pound continues to cause inflation to rise and wage growth to slow, living standards in Britain are likely to worsen.

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But this economic improvement will really depend on whether there will be a "smooth" transition out of the European Union, the Bank said.

But he warned that if wage growth fails to rise, "there will be consequences".

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. Since then, markets have moved to price an earlier rate hike by the bank and sterling has strengthened, which should help to push down on inflation.

"In advance of today's "Super Thursday" announcements, Sterling was on the rise again, reaching rates against its major currency partners not seen for months and even years".

But official data has soured since the start of the year.

"If the chance of a transitional deal does begin to materialize, it might well be that the Bank of England brings forward the point at which it raises interest rates, but at the moment, that does not appear to be on the cards".

'There is some evidence that businesses are hesitating to bring in higher wage costs at a time of some uncertainty about market access and other costs that could be associated with the Brexit process, resulting in more modest wage settlements'.

The Bank is expected to leave record-low interest rates unchanged at Thursday's policy-setting meeting as it seeks more clarity on Brexit, the election and mixed economic data before considering raising rates for the first time in almost a decade.

This could mean a rate rise around the time Britain leaves the European Union at the end of March 2019.