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Financial News: Bank Of England Raises Growth Outlook, Signals More

Bank Of England Raises Growth Outlook, Signals More Rate Hikes In Smooth Brexit

05/02/2019 - 09:07:00 (RTTNews)

(RTTNews) - Bank of England policymakers raised the growth outlook on Thursday and signaled that interest rates may need to be tightened more than what markets currently expect. The nine-member Monetary Policy Committee, led by Governor Mark Carney, held the bank rate unchanged at 0.75 percent, in line with economists' expectations.

The previous change in the bank rate was a quarter-point hike in August 2018 and the rate is now at its highest level since 2009.

The stock of corporate bond purchases was kept at GBP 10 billion and that of government bond purchases at GBP 435 billion.

In its May Inflation Report, the bank raised the first quarter growth projection to 0.5 percent from 0.3 percent predicted earlier. However, the quarterly growth rate is forecast to slow to 0.2 percent in the second quarter. The central bank also raised the growth forecast this year to 1.5 percent from 1.2 percent seen in the February Inflation Report. As global growth stabilizes around its potential rate and Brexit uncertainties subside gradually, GDP growth will start to pick up next year and climb above 2 percent by the end of the forecast period, the bank said. The growth projection for next year was raised to 1.6 percent from 1.5 percent and the outlook for 2021 was boosted to 2.1 percent from 1.9 percent. The upgrade to the first quarter growth projection partly reflected a larger-than-expected boost from companies in the United Kingdom and the European Union building stocks ahead of recent Brexit deadlines.

The UK was originally set to leave the EU on March 29, but the deadline has now been extended to October 31 as the Theresa May government failed to secure lawmakers' approval for a Brexit deal. Speaking at the press conference, Governor Carney said the UK is going through a "period of uncertainty". However, if Brexit takes place smoothly, there would arise a need for "interest rate increases over that period". He also signaled that market expectations of interest rate hikes were insufficient. The BoE now expects the Bank Rate to reach 1 percent by 2021. The bank also said future interest rate hikes should be "gradual and limited". Unless a deal is ratified by the UK much earlier than expected, it is unlikely that the BoE will hike rates this year, ING economist James Smith said.

"The fact that the Bank isn't explicitly warning markets about the risk of more rapid rate hikes is fairly telling," Smith said. "Still, we may begin to see one or two members vote for rate hikes at the next few meetings, acutely aware perhaps that Article 50 may be extended beyond October and wary of the cost of keeping rates lower for longer."

Business investment has remained subdued since the June 2016 Brexit referendum and is expected remain such in the near term, falling an average 0.25 percent each quarter. House prices are forecast to drop 1.25 percent this year. The jobless rate is projected to fall to 3.5 percent by 2022. That will be the lowest figure since 1973. Inflation is expected to slow to 1.6 percent by the end of this year, while it was projected at 2 percent in the February report. Price growth is expected to accelerate to 2 percent towards the end of 2020 and to 2.1 percent in 2021.

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