The Bank of England on Thursday revised up its near-term growth forecasts for the British economy, as it opted against another interest rate reduction in the wake of the country’s decision to leave the EU.
The upward revisions came as the Bank of England decided to keep its main interest rate at a record low of 0.25 percent and as the pound enjoyed one of its best days since Britain voted to leave the EU in June after court ruling that lawmakers had to have a voice in the next step toward Brexit.
The pound spiked 1.5 percent on the news that the government can not trigger the Article 50 process for Brexit without the UK parliament’s involvement. Invoking Article 50 formally starts the two-year countdown to Britain’s exit.
Bank of England Governor Mark Carney described the court decision as an example of the ups and downs to come over Brexit and said the bank’s forecasts take many factors into account.
“It’s an example for the uncertainty that will govern this process,” he said while unveiling the bank’s quarterly economic forecasts.
So far, Britain’s economy has held up much better to a Brexit vote than many forecasters, including those at the Bank of England, expected. Fears over the impact prompted the bank to cut rates for the first time in more than seven years and expand its economic stimulus program in August.
Conceding that its earlier predictions were too gloomy, the bank revised up its growth forecasts for the coming two years. Instead of 2 percent growth this year, it is now penciling in 2.2 percent. And next year, it is now penciling in growth of 1.4 percent instead of 0.8 percent.
The new forecasts come in the wake of figures showing that Britain’s economy grew by a forecast-busting quarterly rate of 0.5 percent in the July to September period.
Carney said much of the resilience that has been exhibited has centered on households seemingly ready to “entirely look through Brexit-related uncertainties” — for now.
“For households, the signs of an economic slowdown are notable by their absence,” Carney told a briefing after the interest rate decision. “Perceptions of job security remain strong. Wages are growing at around the same modest pace as the start of the year. Credit is available and competitive. Confidence is solid.”
Though it upgraded its forecasts for this year and next, the bank cut its 2018 growth prediction from 1.8 percent to 1.5 percent — a sign that the bank thinks the post-Brexit fallout has merely been postponed rather than erased.
Carney also noted the bank’s concern with rising inflation, which if left unchecked could have profound effects on living standards and even prompt the Bank of England to reverse course and start raising interest rates. Carney effectively said the bank now had a neutral bias in terms of interest rates — the next move could be up or down.
The bank is anticipating that inflation could rise to 2.7 percent next year, which is way higher than the current 1 percent rate and above the central bank’s target of 2 percent.
Policymakers said they are “monitoring closely the evolution of inflation expectations” and that they were willing to “accommodate a period of above-target inflation.” However, Carney said there was a limit to how far they would allow inflation to overshoot the target.
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