News Worms
News Worms

Bank issues pay warning and cuts growth forecast as rates held

Bank issues pay warning and cuts growth forecast as rates held

Economists believe the Bank's Monetary Policy Committee (MPC) will keep rates at 0.25%, despite three out of eight policymakers calling for an increase to 0.5% last month and amid conflicting public pronouncements in recent weeks.

All sectors want a transitional arrangement, says Carney, stating it's not limited to finance or manufacturing or any other area of the economy.

Kristin Forbes, one of the MPC (Monetary Policy Committee) members to back a rate rise in June, departed the group and was replaced by Silvia Tenreyro, an academic at the London School of Economics.

The Bank of England's August Inflation Report shows 2017 inflation increasing slightly more than expected in the May report, and GDP growth remaining more sluggish than expected as a result.

Also adding to the dovish arguments were the bank's new macroeconomic forecasts.

In broad terms, the Bank's inflation forecasts remained similar to the last set: the CPI rate is set to rise to close to 3% in the coming months, and will remain above its 2% target all the way through to 2020.

"Brexit downside risks are larger than the MPC can formally acknowledge, which keeps the bar for a pre-2019 rate hike high, in our view", analysts at the bank said in a note to clients.

Quantitative easing was also unanimously kept unchanged at £435bn and corporate bond purchases remained at £10bn.

Tim Graf, head of macro strategy for the Europe, Middle East and Africa regions at State Street Global Markets said "a rate hike /[IS/] now looking unlikely for the remainder of this year, probably much longer".

Speculation over the likelihood of the Federal Reserve raising interest rates again before the end of the year could also put pressure on risk-sensitive Australian Dollar, with a strong U.S. non-farm payrolls report having the potential to send the GBP AUD exchange rate to a fresh high. Considering the BOE does not expect United Kingdom growth to rise above 2% for the entire forecast period, perhaps the FX market is right to test Carney and co's resolve to hike at all in 2018...

The report maintained expectations on inflation, predicting it would peak at around 3 per cent in October.

He said uncertainty about Brexit - in particular lower investment by companies - meant the economy could not grow as fast as before without pushing up inflation.

Nevertheless, GBP/USD retreated to 1.3145 having traded as high as 1.3268 after the slight improvement in the July services PMI.

The price of ten year United Kingdom government bonds also dropped as investors expected the currency to fall.

This £15bn increase was due to the fact that banks had lent out more cash in the past year than expected - and bank lending is now being supported by the Bank's Term Funding Scheme. Standing out was the considerable reduction in wage growth forecasts to 3.0% annually for 2018 from 3.5% just two months ago.

It blamed the downgrade on Britain's stubbornly weak productivity and in part on the Brexit uncertainty.

The Bank's inflation forecast was largely unchanged from May.

The policy makers said United Kingdom wages are expected to "remain subdued" for the rest of the year, while also cutting its salary growth for 2018 to 3% from 3.5% expected previously.


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