Bank of England holds monetary policy as it downgrades growth forecast on warnings of real wage fall

 
Jasper Jolly
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Governor Mark Carney chairs the Monetary Policy Committee (MPC) (Source: Getty)

The Bank of England’s top economists have voted to keep interest rates on hold as expected, but a warning that falling real wages for British consumers will hold back the economy more than previously expected pushed sterling lower.

The Bank downgraded its forecasts for UK GDP growth from two per cent to 1.9 per cent this year, although it moved its forecast of 1.7 per cent growth in 2018 marginally upwards.

The rate-setting Monetary Policy Committee (MPC) predicted real incomes will fall in 2017 as average earnings slow down more than previously thought. That pushed sterling down 0.6 per cent against the dollar in lunchtime trading, to $1.2863.

Their forecasts show average weekly earnings only rising by two per cent this year, with inflation to peak just below three per cent around the end of the year. The annual rate of consumer price index inflation hit 2.3 per cent in March.

The small downgrade comes after a first quarter in which slower consumption put a brake on growth, with a weak 0.3 per cent quarterly expansion that surprised many economists.

An eye on tightening

Yet despite the slower near-term growth the Bank emphasised that bank rate, the interest rate available to other lenders, could rise “by a somewhat greater extent” than markets were pricing in, if its predictions of a continued pick-up in growth are accurate.

Market expectations, which underpin some of the Bank's forecasts, predicted only one interest hike in the next three years. However, markets have priced in a slightly faster pace of tightening since the Bank's cut-off for data, which could affect its future course.

The improvement in global conditions, as well as the recent rebound in the value of sterling, will lead to a gradual pick-up in wages and therefore spending after a short-term dip, the Bank’s forecasts showed.

The Bank predicts real wages to accelerate in 2018 and 2019 as the labour market tightens further, with unemployment forecast to fall as low as 4.5 per cent by 2020, its lowest point since July 1975.

The Bank’s forecasts are based on a “smooth” adjustment to a new trading relationship with the EU after Brexit, the MPC said.

The minutes from the MPC's latest meeting reiterated that the “exceptional circumstances” of the Brexit process meant it was justified in allowing inflation to significantly overshoot its two per cent target.

No upsets on the MPC

The balance on the MPC remained largely unchanged from the previous meeting apart from the absence of former deputy governor Charlotte Hogg, who recently resigned after breaking the Bank’s code of conduct.

The MPC voted seven to one in favour of holding bank rate at 0.25 per cent, with Kristin Forbes the only dissenter.

Forbes, an external MPC member who will leave the committee in June after one more meeting to return to academia, stuck to the same stance as the last meeting, when she became the first member to cast a vote for a hike in interest rates since January 2016.

The minutes showed once more that “some members” thought it would take “relatively little further upside news” to prompt tighter policy.

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