The Bank of England slashed its economic growth forecast for 2018 today as its policymakers kept interest rates on hold at 0.5 per cent.
After a slew of poor economic data in recent weeks, the central bank now expects the UK economy to grow by a paltry 1.4 per cent this year – markedly lower than the 1.8 per cent it had previously pencilled in.
But the decision to keep the bank rate on hold was not unanimous, with two members of the monetary policy committee voting for a hike to 0.75 per cent.
Bank of England Governor Mark Carney said the ‘underlying pace of growth remains more resilient than the headline data suggests’.
Until a few weeks ago, the markets had priced in a probable rate rise at this meeting, but downbeat economic signals and a ravaged retail scene have since swayed the MPC’s outlook.
The pound was hit by the Bank’s downbeat assessment of the UK economy – revealed in the quarterly inflation report it published alongside its rates decision today – which implies that a rate rise in the coming months is unlikely.
It slid against both dollar and euro to $1.351 and €1.137.
Revealing a glimmer amid the gloom for British household finances, the Bank said that high inflation would abate sooner than previously thought.
And it said it expected the first quarter growth figures to be revised higher, estimating underlying growth at around 0.3 per cent, while it added activity would bounce back in the second quarter.
UK economic growth has nearly flatlined in recent years.
How households have seen interest rates change over the last couple of years.
And while Brexit-fuelled inflation has fallen sharper than expected in recent months, the Bank said rate hikes would still be needed over the next three years, with cost pressures building in the economy.
The Bank said that, ‘Taking external and domestic influences together, CPI inflation is projected to fall back slightly more quickly than in February, reaching the target in two years.
‘These projections are conditioned on a gently rising path for the Bank Rate over the next three years.’
While the decision not to raise rates will be welcome news to those about to buy a home or remortgage it will be less well received by savers with funds languishing in savings accounts that can’t beat inflation.
Kevin Doran, chief investment officer at AJ Bell, said that the Bank’s announcement ‘heaps more pain on savers who have already lost a third of their purchasing power over the past 10 years as inflation has comfortably outstripped the meagre interest earned on their cash’.
‘The prospect of a tight labour market, a bubbling crude and weaker sterling seems set to only stoke inflation higher in coming months, with little solace on offer from the Bank,’ he added.
‘In a world where other central banks are seeking to normalise their rates, the combination of slow growth and Brexit uncertainty must surely be raising some concerns about the size of the current account deficit.’
The cut to the 2018 forecast comes after a shock slowdown in growth to 0.1 per cent in the first quarter as the impact of the Beast from the East compounded woes in consumer and construction sectors.
But in a press conference Bank of England Governor Mark Carney said the ‘underlying pace of growth remains more resilient than the headline data suggests’.
He added that, ‘While the storms of February and March have given way to sunnier skies, the economic outlook for the UK remains clouded by Brexit uncertainties.
‘Despite the welcome agreement on a transition period, the terms on which the UK will trade with the EU and beyond that period remain to be determined.
How the Bank sees economic growth developing until the first quarter of 2021.
‘As negotiations progress this year, the medium term outlook will become clearer.’
Chris Williamson, chief business economist at IHS Markit, said the fact that the Bank kept its medium-term outlook unchanged ‘leaves expectations alive for rates to rise later in the year.’
He said the move was likely to take place in August ‘highlighting how policymakers believe the recent weak start to 2018 to have been a temporary soft patch, linked mainly to heavy snowfall’.
He added: ‘However, the Bank is also worried that the underlying pace of economic growth may have in fact waned so far this year.
‘Survey data suggests that some of this slowdown can be linked to weaker economic growth in continental Europe, but companies are also reporting that domestic demand among households and businesses has continued to be dampened by uncertainty about the economic outlook and higher prices.’
The UK’s estate agents delivered the latest bit of gloomy news on the UK economy today with a report showing property price is at its lowest level since 2012.
How the Bank now sees inflation playing out over the next three years.
The Royal Institution for Chartered Surveyors said that April saw a slight decline in average prices across the UK, but but quite big falls in values in London – particularly among homes in the £500k to £1million bracket.
Meanwhile after a raft of High Street names, including , have announced actual or planned store closures recently, the latest data this week showed retailers saw sales fall ‘off a cliff’ last month.
Not helped by the earlier timing of Easter, retail sales decreased by 4.2 per cent on a like-for-like basis in April compared to the same month last year, the biggest ever decline since the British Retail Consortium and KPMG records began in 1995.
For the two dissenters on the MPC – Ian McCafferty and Michael Saunders – the case for an immediate rate rise had not changed, given the ‘temporary or erratic’ first quarter growth data.
They repeated their calls for a rise to 0.75 per cent to avoid more ‘abrupt’ policy action further down the line.