The Bank of England hinted there may be a need for faster rate increases in the coming years in a report dominated by uncertainty over Brexit.
The Monetary Policy Committee, led by Governor Mark Carney, said the economy may start running hot earlier than previously anticipated as wage growth improves and domestic costs build. It sees the inflation rate staying above its 2 percent goal for the next two years. Interest rates were left unchanged on Thursday.
The slightly hawkish bias compared with August is tempered by the fact that the forecasts are based on an assumption for a smooth Brexit that may not come to pass. It said the exit deal with the EU remains the biggest factor when it comes to the economy and monetary policy.
“The monetary policy response to Brexit, whatever form takes, will not be automatic and could be in either direction,” the bank said in its quarterly Inflation Report. While the exact impact of Brexit “cannot be determined in advance, under all circumstances, the MPC will respond to any material change in the outlook.”
In a sign of how Brexit is affecting the economy, the BOE slashed its forecast for business investment and sees stagnation this year. It also lowered its 2019 economic growth outlook slightly, to 1.7 percent. On the global economy, it said growth has become more uneven, and downside risks have increased.
The U.K. predictions, including the outlook for faster inflation, are based on market measures indicating that the BOE will deliver about three more quarter-point rate hikes by late 2021, more than were foreseen a few months ago.
But with its forecasts zero-weighted for a disorderly Brexit, there’s an increasing chance they will ultimately have to be thrown out.
The BOE assumes a relatively stable path for the pound over the next three years, a crucial determinant for inflation. At the same time, it said the currency will probably rise if there’s a Brexit deal that keeps a close relationship with the EU, or drop if the U.K. crashes out without new trade arrangements.
The BOE also noted that the situation is now different from just after the 2016 referendum, when inflation was below target and demand was weaker than supply. At the time, the bank unleashed a new round of stimulus to support growth, but it notes that there’s little it can do to offset supply shocks.
The minutes of the meeting reiterated that limited and gradual rate increases will probably be needed over the next few years. The MPC voted 9-0 at this decision to hold the benchmark interest rate at 0.75 percent, as predicted by all 56 economists in a Bloomberg survey.
Source : Bloomberg