Economy

United Kingdom momentum will bounce back, BoE's Carney says

United Kingdom momentum will bounce back, BoE's Carney says”

Despite the large downgrade to Q2 growth forecasts, the Bank did not change it's Q2 2019 and 2020 forecasts, however, which remained at 1.7% (see table below).

The outlook for the interest rate path in the United Kingdom after May Inflation Report from the Bank of England sees even lower than 90 percent chance for the bank to move in November.

He argued that the "underlying pace of growth remains more resilient than the headline data suggest", though the bank still had to revise down its forecast for this year's growth to 1.4 percent from 1.8 percent.

The BOE isn't the only central bank to wobble on the exit ramp from the easy money of the past decade, even as the US Federal Reserve sticks to its plan to gradually raise rates.

The Bank of England has backed away from raising interest rates following a sharp slowdown in growth.

In minutes of the MPC meeting, the Bank said: "Weakness in the data for the first quarter had been consistent with a temporary soft patch, with few implications for the current degree of slack or for the outlook for the United Kingdom economy".

The financial markets are indicating there will be an interest rate increase towards the end of 2018 followed by another in 2019, and a further one in 2020.

"It looks like the 2018 rate hike has been delayed not cancelled", Fitch Ratings chief economist Brian Coulton said. But the chances of that happening sooner rather than later has receded.

Though the national statistics office downplayed the impact of the cold weather on growth, the Bank of England said the so-called "Beast From the East" cold weather front was a key factor.

"There was value in seeing how the data unfolded over the coming months, to discern whether the softness in Q1 might persist", they said.

The ONS released data today showing that industrial production expanded just 0.1% in March from February.

"They had a little bit of time on their hands to wait and see if the second-quarter data bounces back", says Victoria Clarke, an economist at Investec in London.

The inflation report also reduced inflation forecasts to 2.4% in Q2 - from 2.7% previously - and by a basis point in the following years.

The two rate-setters who opted for an immediate quarter-point increase noted that unemployment is at its lowest level since 1975 and wages are growing, which could push up inflation.

Frances Haque, Santander's United Kingdom chief economist, commented: "The MPC's decision was widely expected given the disappointing economic data for Q1 2018, with GDP growth being significantly below expectations and inflation surprising to the downside".

Practically, this largely involves the Bank adjusting interest rates to try and keep inflation at, or as close to, a target of 2%. The Bank of England has marched investors up to the top of the hill only to march them back down again.



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