BoE Warns Of Increase In Interest Rate Amid Positive Economic Outlook

  • May 06, 2019 BST
  • Team Kalkine
BoE Warns Of Increase In Interest Rate Amid Positive Economic Outlook

The Bank of England in its latest meeting raised its growth forecast for the British economy through the next three years, as the central bank published new economic forecasts for the first time since the deadline for the UK to leave was extended to October. The minutes of the meeting mentioned that the timing and nature of Brexit remained the biggest factor for the outlook, as the economy has been hobbled by the uncertainty, leading to a year of falling investment.

The bank signalled that it’s in no rush to raise interest rates despite stronger economic growth, as Monetary Policy Committee voted unanimously to maintain Bank Rate at 0.75% and to keep the asset purchase program unchanged. Interest rates were last changed in August 2018, when the central bank raised them by a quarter of a percentage point.

The BoE now sees a growth of 1.5% this year, up from February's forecast of 1.2%, suggesting that forecasts were relatively upbeat. Economic growth has been subdued since the UK voted in June 2016 to leave the EU but economic activity in the first quarter was bolstered in part by an increase in manufacturing. However, this build-up in activity is expected to dissipate in the second quarter, and the strengthening of the global economy will have a more important effect. The bank lifted its forecast in part because the outlook for the global economy is a bit brighter and had shown signs of stabilisation, with growth better than expected.

The bank was optimistic about the labour market as well and projected that unemployment would fall further in the coming years to the lowest rate since 1973 by 2022. Though consumer price inflation is still slightly below the target of 2 per cent and the bank cut its near-term inflation outlook, it predicted that the economy would generate more excess demand than previously anticipated. It also said that growth would pick up strongly after a mediocre 2019 and the excess spending would push up inflation.

The bank, which assumes a smooth Brexit process over the next three years, was considerably more hawkish than economists had expected and said benchmark interest rate might be increased more than once over that period to control inflation. This position was contrary to easing of monetary policy signalled in recent weeks by the US Federal Reserve and to the European Central Bank.

Speaking after the Bank of England’s Monetary Policy Committee, Mr Carney warned that a modest recovery over the next three years would lead to higher interest rates as the excess spending would push up inflation. He said that Britain was likely to raise interest rates multiple times as inflationary pressures force the central bank to act. As investors were predicting only one more quarter-point hike between now and 2021, he further remarked that there would be a need to increase interest rates to keep inflation at its 2 per cent target and these would be “more frequent than financial markets currently expect”.

The bank also commented on the lack of clarity due to Brexit and said that business investment has fallen over the past year and could continue to hamper economic activity. The minutes showed that committee members were still worried that Brexit could derail the economy if there was a no-deal rupture in October and noted that it would be difficult to establish the performance of the economy in the coming months because Brexit might make data volatile.

With Bank of England reducing the interest rates to a historic low level, the spotlight is back on diverse investment opportunities. 

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