The Bank of England cut its forecasts for British economic growth over the next three years yesterday. It cautiously backed bets in financial markets that it will only start to raise interest rates in around a year.
The central bank now expects growth this year of 2.5% down from a 2.9% projection in February and closer to most other economic forecasters’ expectations.
Britain was the fastest-growing major advanced economy in 2014, as it made up ground lost during the financial crisis, but the recovery has slowed since the start of this year.
The bank said its growth downgrade was because interest rates were likely to increase slightly faster than markets had expected three months ago, sterling had strengthened and the outlook for house-building and productivity had weakened.
“Productivity is not something that monetary policy determines and the timing and extent of any prospective pick-up in productivity growth remains our most difficult judgment,” Bank of England governor Mark Carney said yesterday as the bank published its quarterly Inflation Report.
The bank said a jump in low-paid jobs had dampened wage and productivity growth but this would lift as new hiring ebbs. Sterling fell against the dollar and British government bond futures briefly rose.
Economists said the new forecasts did little to change the outlook for rates. BNP Paribas economist Dominic Bryant said the bank was in a holding operation.
“The bank seems in no hurry to raise rates this year, while next year is sufficiently far away that it does not feel the need to micro-manage expectations,” he said.
After suggesting in April that markets were too relaxed about the timing of a rate hike, policymakers appeared happier and said the market pricing was consistent with inflation hitting its 2% target within two years. The bank’s forecasts are based on market pricing — it will start to raise rates from their record-low 0.5% in the second quarter of next year and approach 1% by late 2016.
The Bank of England has kept rates unchanged for more than six years. It warned markets a year ago that they could rise sooner than expected but then oil prices tumbled and took inflation to a record-low of zero. Mr Carney reiterated that inflation was likely to turn negative over the next few months before recovering next year.
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