UK central bank upgrades growth outlook to 2%

Bank of England governor Mark Carney

The UK’s central bank has increased its central expectation for UK growth in 2017 to 2% — up from its November forecast of 1.4% — and expects growth of 1.6% in 2018 and 1.7% in 2019.

The Bank of England’s Monetary Policy Committee (MPC) said the upgraded outlook “reflects the fiscal stimulus announced in the chancellor’s Autumn Statement, firmer momentum in global activity, higher global equity prices and more supportive credit conditions, particularly for households.”

The MPC said domestic demand had been stronger than expected over the past few months, and there have been relatively few signs of the slowdown in consumer spending that the committee had anticipated following the EU referendum.

“Nevertheless, continued moderation in pay growth and higher import prices following sterling’s depreciation are likely to mean materially weaker household real income growth over the coming few years,” said the bank.

” As a consequence, real consumer spending is likely to slow.”

The MPC sets UK monetary policy to meet its 2% inflation target “in a way that helps to sustain growth and employment.”

At its meeting ending February 1, the committee voted unanimously to maintain the bank rate at 0.25%.

The committee voted unanimously to continue with the programme of sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, totalling up to £10 billion.

The committee also voted unanimously to maintain the stock of UK government bond purchases, financed by the issuance of central bank reserves, at £435 billion.

The bank said the value of sterling remained 18% below its peak in November 2015, reflecting investors’ perceptions that a lower real exchange rate will be required following the UK’s withdrawal from the EU.

“Over the next few years, a consequence of weaker sterling is that the higher imported costs resulting from it will boost consumer prices and cause inflation to overshoot the 2% target,” said the bank.

“This effect is already becoming evident in the data.

“CPI inflation rose to 1.6% in December and further substantial increases are very likely over the coming months.

“In the central projection, conditioned on market yields that are somewhat higher than in November, inflation is expected to increase to 2.8% in the first half of 2018, before falling back gradually to 2.4% in three years’ time.

“Inflation is judged likely to return to close to the target over the subsequent year.”

The bank concluded: “In judging the appropriate policy stance, the committee will be monitoring closely the incoming evidence regarding these and other factors.

“For instance, if spending growth slows more abruptly than expected, there is scope for monetary policy to be loosened.

“If, on the other hand, pay growth picks up by more than anticipated, monetary policy may need to be tightened to a greater degree than the gently rising path implied by market yields.

“Monetary policy can respond, in either direction, to changes to the economic outlook as they unfold to ensure a sustainable return of inflation to the 2% target.”