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Bank warns of 'moderate' growth as it keeps interest rates at 0.25%

17 May 2017

Despite BOE governor Mark Carney warning only last February of the "twists and turns" heading into Brexit - nearly immediately proved true in mid-April when PM Theresa May called for general elections to be held on the 8th of June this year - the BOE remains optimistic over the growth outlook. Rising inflation and poor income growth were cited as the main reasons for consumers feeling the squeeze; reflected in disappointing retail sales data and a surprisingly steep drop in new vehicle sales.

The BOE said Thursday its latest projections assumed a "smooth" Brexit, with a transition period that largely preserved current trading and other arrangements beyond its three-year forecast period. Usually Bank of England inflation forecasts show inflation falling steadily back to target. Inflation will continue to rise above the 2% target.

'This is conditioned on the assumptions that the adjustment to the United Kingdom's new relationship with the European Union is smooth, and that Bank Rate follows the market-implied path for interest rates. The BoE is mandated to keep inflation as close to 2% as it can, so recent overshoots are a concern for policymakers.

In view of this, the Bank trimmed this year's forecasts slightly to 1.9 per cent from 2 per cent in February after a sharp slowdown in the first three months of the year, but it upgraded next year's from 1.6 per cent to 1.7 per cent.

Michael Saunders, who left Citi to join the MPC in August, hinted in April that he might side with US academic Kristin Forbes, so far the sole supporter on the MPC for raising rates from their current level of 0.25%.

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Ben Brettell, senior economist at Hargreaves Lansdown commented: "Unsurprisingly interest rates were left unchanged, with just Kristin Forbes voting for a 0.25% rise to 0.5%". It raised its growth forecast for 2018 to 1.7% up from 1.6% in February.

It said consumers were being squeezed between sluggish income growth and rising inflation, and that could be seen in weak retail sales and a sharp fall in new auto registrations in April.

The Bank of England cautioned Thursday said consumer spending is slowing in response to rising inflation.

The pound was down 0.65% against the greenback at 13:00 BST in London at $1.2854.

Sterling, which was trading at $1.2938 earlier, fell to $1.2906 after the data, down almost 0.3 percent on the day.

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The Bank said consumers were beginning to feel the pinch from surging inflation as the pound's plunge since the Brexit vote has pushed up prices.

Matt Whittaker, Chief Economist at the Resolution Foundation, said: 'The Bank's judgement on the UK's earnings prospects reflects the relatively weak start our economy has made to 2017. Only one member of the committee voted to raise interest rates by 25 basis points.

"The million dollar question is what is worse: a rate rise too early or a rate rise too late?"

Carney, who is due to speak after the BoE publishes its May policy decision and new economic forecasts at 1100 GMT, might seek to remind investors and the public that rates are likely to rise at some point in the next couple of years.

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