The Bank of England revised up its growth forecasts for the British economy on Thursday as it opted against another interest rate reduction in the wake of the country’s decision to leave the European Union. Conceding that its earlier predictions over growth were too gloomy, the bank’s policymaking Monetary Policy Committee kept its main interest rates at a record low 0.25 percent.
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The announcement was widely expected following recent figures showing that Britain’s economy grew by a forecast-busting quarterly rate of 0.5 percent in the July-September period and signs of a marked pick-up in inflation. The vote was unanimous among the nine-member panel.
The British economy has showed unexpected resilience following the Brexit vote. Growth has been stronger than many economists, including forecasters at the Bank of England, had anticipated. Analysts feared growth would slow after the June 23 vote to leave the EU, a decision which spurred the bank to cut rates and expand its economic stimulus program in August.
In its quarterly economic forecasts that accompanied the rate decision, the Bank of England revised up its growth forecasts for the coming two years. Instead of 2 percent growth, it’s now penciling in 2.2 percent for this year. And next year, it’s now penciling in growth of 1.4 percent instead of 0.8 percent. It’s also anticipating that inflation would 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.
“Given the projected rise in unemployment, together with the risks around activity and inflation, and the potential for further volatility in asset prices, the (committee) judges it appropriate to accommodate a period of above-target inflation,” minutes of Thursday’s meeting showed. “That notwithstanding, the MPC is monitoring closely the evolution of inflation expectations.”
Economists have warned the real test to the British economy will come in March, when Prime Minister Theresa May plans to formally notify the EU of Britain’s intention to leave. That will trigger at least two years of negotiations which will highlight threats to the economy, the biggest of which is the possible loss of tariff-free access to a market of 500 million people.
“The Bank of England has wisely stepped back from cutting interest rates for now,” said Aberdeen Asset Management Senior Economist Paul Diggle. “The activity data has been better than was expected, and with sterling having cratered and inflation already picking up, this wasn’t really the time to cut.”
The pound has borne the brunt of market unease over the Brexit vote, losing almost a fifth of its value.
However, on Thursday, the pound enjoyed one of its best days since the vote when it surged after a court ruling that the government can’t trigger the Article 50 process for Brexit without Parliament’s involvement. Invoking Article 50 formally starts the two-year countdown to Britain’s exit from the EU and the start of likely-tough negotiations.
The pound was up 1.5 percent at $1.2484 as traders reacted to the news.
Many in the markets hope that the court ruling will at the least delay the process of Britain’s exit from the EU or diminish the government’s ability to push through a so-called “hard Brexit,” which would see Britain leave the European single market. The hope is that lawmakers won’t give their backing if the government intends to push for that sort of deal.
In spite of that rise, there are concerns that the pound’s slide will lead to much-higher inflation. Though a lower pound makes British exports more competitive in international markets, it has the potential to stoke inflation by raising the cost of imports, such as oil and food, more expensive. A number of surveys are pointing to sharply rising input costs.
Simon Kirby, head of macroeconomic modeling and forecasting at National Institute of Economic and Social Research, said “the depreciation of sterling has been the most striking feature of the post-referendum economic landscape.”
“This will pass through into consumer prices over the coming months and quarters,” he said.