Central bank predicts economy will grow by 2% this year as consumers and businesses appear to shrug off Brexit blues

This article is more than 3 years old

This article is more than 3 years old

The Bank of England has painted a brighter outlook for the UK economy this year, with faster growth, lower unemployment and a more modest rise in inflation.

After further signs that consumers and businesses have shrugged off the Brexit vote, the Bank revised its earlier gloomy forecasts to predict the economy would grow 2% this year - matching its 2016 performance.

That forecast was above the 1.4% figure policymakers had pencilled in for 2017 in November. It was also in stark contrast to the sharp slowdown predicted by the Bank and others in the immediate aftermath of the vote to leave the EU.



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But despite more optimistic forecasts, the central bank highlighted risks ahead. It expects business investment to fall and consumer spending to slow as rising inflation eats into household budgets. It also raised concerns about households becoming overstretched, as it predicted people would use savings to spend.

At its rate-setting meeting the Bank’s monetary policy committee, led by governor Mark Carney, voted unanimously to hold interest rates at the record low of 0.25% and to continue with a programme of electronic money printing known as quantitative easing.

Presenting the Bank’s forecasts, Carney said that plans for more government spending, stronger world growth and other factors had made policymakers more upbeat. He conceded the Bank had been too gloomy on the prospects for consumer spending since the Brexit vote. “Growth has remained resilient since the referendum,” he told a news conference.

But he flagged potential challenges ahead and sought to emphasise that the Bank could still move interest rates in either direction.

“The Brexit journey is just beginning. While the direction of travel is clear, there will be twists and turns along the way. Whatever happens, monetary policy will be set to return inflation sustainably to target while supporting the necessary adjustments in the economy,” Carney said.

Minutes from the rate-setting meeting revealed that some members of the nine-strong committee were growing more worried about inflation, which has been rising as the weak pound pushes up import costs.

The Bank’s forecast for inflation, however, was little changed from its last outlook in November. That was largely because it now believes unemployment can fall further than previously thought before wages start to accelerate.



That relatively benign inflation outlook helped push the pound down, with investors seeing less reason for interest rates to be raised to keep prices rises in check.

After last June’s vote to leave the EU, the Bank stepped in with an interest rate cut and more QE to shore up confidence. Carney defended that action on Thursday, saying it was the correct thing to do in “pretty exceptional circumstances” and that the moves had supported growth.

Since the referendum, the Bank has faced the balancing act of safeguarding growth and jobs while being careful that very loose borrowing conditions do not allow inflation to rise too quickly.

Carney has repeatedly asserted that the Bank is comfortable letting inflation go above the government-set target of 2% to protect jobs but that there are limits to how far an overshoot can be tolerated.

The minutes to the latest rate-setting meeting noted an important shift for some policymakers who now felt “the risks around the trade-off” between supporting growth and controlling inflation “had moved a little closer to those limits”.

The key forecast changes in the latest inflation report are:

• The Bank expects official figures to eventually show the economy grew 2.2% in 2016, compared with an early estimate from the statistics office of 2.0%.

• The economy is expected to grow 2.0% in 2017, 1.6% in 2018 and 1.7% in 2019. That compares with November forecasts of 1.4%, 1.5% and 1.6%, respectively.

• Carney emphasised the level of GDP would still be 1.5% lower in two years’ time than projected before the referendum in May.



• Inflation to be 2% this quarter, 2.7% in early 2018 and 2.6% in early 2019. That compares with November forecasts of 1.8%, 2.8% and 2.6%, respectively.

• Unemployment forecasts were revised down. Expected to be 4.9% this quarter, 5.0% in early 2018 and 5.0% in early 2019. That compares with November forecasts of 5.0%, 5.5% and 5.6%, respectively.







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Suren Thiru, head of economics at the British Chambers of Commerce, said the Bank now had a brighter outlook but he expected policymakers to hold off rates rises this year given the uncertainty ahead.

“We predict that the MPC will continue to ‘look through’ the expected rises in inflation and opt for an extended period of monetary stability,” said Thiru.



But Kallum Pickering, economist at the bank Berenberg, said the Bank was at risk of falling behind events if it stuck with its very loose policy position for too long.

“At close to full employment and with stable expected growth, with its large balance sheet and negative real rate policy, the BoE is at risk of engendering a return to high indebtedness, inadequate saving and ultimately a return to boom-bust,” he said.

Anti-poverty campaigners the Joseph Rowntree Foundation said the Bank’s brighter outlook on growth would bring little comfort to those on low incomes – a group the government has dubbed “just about managing” and vowed to help.

“People on lower incomes can’t rely on economic growth alone to raise their living standards,” said the foundation’s chief executive, Campbell Robb. “Less wealthy families spend more of their income on basics like the weekly shop, meaning that they are hit harder by rising prices.”