Bank of England completes its u-turn on economy

Bank of England completes its u-turn on economy

Bank of England completes its u-turn on economy

UK GDP will grow by two per cent this year, according to the Bank's latest forecasts, staying at the same rate as confirmed growth in 2016.

The new forecasts are the latest embarrassment for the Bank.

The pickup in prices partly reflects the pound's 15 per cent drop since the Brexit vote last June. Yet today's inflation forecast puts CPI at 2.4 per cent in three years' time (up from 1.6 per cent now).

Forecasts for the rate of unemployment have been revised down.

The Bank's forecast for 2017 gross domestic product was lifted significantly to 2% from the 1.4% predicted in November and dire warnings about the impact of Brexit issued earlier a year ago. It now thinks the economy can run at a lower level of unemployment - 4.5% rather than 5% - without wage pressures starting to build.

However it also pointed out that much of the coming years' economic growth would be due to consumer borrowing, with the household saving rate dropping to its lowest level since comparable records began in 1963.

The Monetary Policy Committee of the BoE, governed by Mark Carney, unanimously chose to hold the key bank rate at 0.25% and the corporate bond purchase plan at up to GBP 10 billion. The Bank also noted that United Kingdom growth upgrades were linked to a relaxed United Kingdom fiscal stance, momentum in the global economy, easier credit conditions and strong 2016 GDP growth.

In the minutes of the meeting, the Bank said that it expects inflation to rise "markedly" above the 2% target over the coming months as a result of the weakness in the pound.

The BOE sees inflation averaging 2.7 per cent this year and 2.6 per cent in 2018, little changed from its November projections. It made no change to its smaller corporate bond buying programme.The BoE to stuck to its announcement in November that it its next policy move could be a rate hike or a cut, reflecting the uncertain outlook for the economy.Before Thursday's announcement, financial markets had been pricing in a roughly 50-50 chance of a rate hike by the BoE this year.

"If we do see a situation where there is faster growth and wages than we anticipated or spending doesn't decelerate later in the year, one can anticipate there would be an adjustment of interest rates", Carney said.

"As expected, headline inflation has increased recently, largely owing to base effects in energy prices, but underlying inflation pressures remain subdued", the European Central Bank said in its first economic bulletin for the year.

It blames that deceleration on an expected slowdown in spending by households as they adjust to higher inflation.

Shares in Vodafone rose 0.2p to 193.2p as the mobile giant said it would meet the lower end of its full-year earnings outlook amid mounting competition in the United Kingdom and India.

Market participants took the monetary policy statement as a negative for sterling and if current losses are sustained, a negative reversal signal, a bearish engulfing pattern, will be confirmed on the daily chart, warning that additional losses are likely.

Still, the BoE's monetary policy committee, which voted unanimously to leave interest rates and asset purchases on hold on Thursday, reiterated that there are "limits to the extent that above-target inflation can be tolerated".

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