Bank of England upgrades UK growth forecasts again

The Bank of England upgraded UK growth forecasts significantly for the second time in six months on Thursday in the latest indication the central bank’s once-dire outlook for the economy after June’s Brexit vote has been proven overly pessimistic.

The bank said it now predicts gross domestic product will grow 2 per cent this year, the same as last year and up from 1.4 per cent forecast in November. Shortly after the referendum, the BoE predicted the economy would expand just 0.8 per cent.

The latest revision leaves the bank’s forecast for this year only slightly lower than the 2.3 per cent growth they predicted in May, just before Britons voted to leave the EU.

Despite the upgrade, the BoE still thinks the economy will slow over the next two years as the impact of Brexit begins to bite, with growth hitting just 1.6 per cent in 2018 and 1.7 per cent in 2019.

Due to the gloomy long-term outlook, the BoE’s rate-setting Monetary Policy Committee voted unanimously to keep interest rates at their historically low 0.25 per cent. It also maintained the current level of bonds it purchases, a stimulus policy designed to lower borrowing costs across the economy.

Governor Mark Carney has repeatedly come in for criticism from Brexit supporters who accused the BoE of politicising its economic forecasts before the June vote and of stoking jitters that could damage the economy’s health.

���The BoE has consistently got its forecasts wrong,” said Gerard Lyons of Netwealth Investments, a former adviser to Boris Johnson, the foreign secretary and prominent Brexiter. “People are allowed to get their forecasts wrong but . . . when there’s a consistent bias, that’s when you have to reassess.”

Mr Carney said his outlook was buoyed by improved prospects for global growth, which have been lifted with the expectation of stimulative tax cuts and infrastructure spending in Washington under President Donald Trump. Interest rate cuts in August had also had “more traction” than the bank initially predicted, he said.

The biggest miscue in the bank’s forecast last summer was the failure to anticipate the resilience of consumer spending following the vote for Brexit, however. Rather than cutting back, consumers have carried on spending, supported by rapid growth in consumer credit.

The bank’s new forecast assumes household saving rates will continue to fall over the next three years, dropping to levels not seen since records began in 1963. The added spending from savings is expected to help moderate the economic slowdown even as wage growth struggles to keep pace with inflation.

Mr Carney defended the BoE’s earlier pessimism by arguing the summer turnround was “pretty exceptional” and noting that all surveys of consumer and business confidence dropped sharply following the June vote.

The governor said the decision to cut interest rates and increase bond purchases in August had been correct: “I’m not going to overstate the case, but there is a case that we helped support the economy during an important time,” he said.

The outlook on inflation remained largely unchanged: in part because of the weakening pound, the bank expects it to overshoot the 2 per cent annual target for a prolonged period, peaking at 2.8 per cent in the first half of 2018.

Since November, sterling has strengthened, reducing inflationary pressures since the last forecast. But other factors such as rising oil prices have balanced out expectations.

Still, most members of the MPC are unconcerned about inflation. Following a review of the UK labour market, they now judge there is more scope for even lower unemployment without pushing up wages and prices.

“We think the economy can run with a lower rate of unemployment without us having to adjust policy,” Mr Carney said.

The minutes of the monthly MPC meeting revealed that other members of the committee are approaching the limits of their tolerance for inflation above the 2 per cent target.

While the committee reiterated that monetary policy could next respond “in either direction”, they also said there are “limits to the degree to which above-target inflation could be tolerated”. The minutes recorded that, for some committee members, the latest revisions had moved them “a little closer to those limits”.

The UK economy at a glance

A one-stop overview of the key UK economic data, including GDP, inflation and unemployment

MPC members face a trade-off between acting quickly to ensure inflation comes in at the 2 per cent target — which would require the BoE to step on the breaks and either raise rates or cut bond purchases — or continuing to provide stimulus to the economy.

Mr Carney said if there was “faster growth of wages” or if “spending does not decelerate later in the year”, there could be “an adjustment of interest rates”.

In November, the bank forecast unemployment would rise from 4.8 to 5.6 per cent by the start of 2019. They now expect unemployment to rise no higher than 5 per cent.

This implies there will be 250,000 fewer people unemployed at the start of 2020 than they predicted in November. However, their forecast for wage growth during the next three years has fallen.

The shift of opinion on the labour market helps explain why committee members remain happy to tolerate above-target inflation.

However, the minutes noted that “the more time passed without a noticeable reduction in economic growth, the more difficult it would become to tolerate” higher inflation.

Total government bond holdings will be unchanged at £435bn and the bank will continue with its planned purchase of corporate bonds, which will rise to £10bn over the next year.