Friday 5 February 2016

Bank of England cuts growth forecast

In World Economy News 05/02/2016

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The Bank of England has cut its forecast for economic growth. In its latest Inflation Report, it has cut its prediction for GDP growth this year from 2.5% in November to 2.2%.
The central bank also released the minutes of the latest meeting of its interest rate-setting committee.

It voted 9-0 to keep interest rates at 0.5%. Ian McCafferty, who had been voting for an increase since August, unexpectedly voted for no change this month.
The report downgraded the Bank of England’s expectations about what is going to happen to wages.
The Bank now expects average weekly earnings to increase by 3% this year, down from the 3.75% it predicted three months ago.

The Bank said that persistent low inflation, increases in population and therefore labour supply and changes in taxes meant that it was unlikely that incomes would increase at the rate suggested last autumn.
It said that wage growth had “eased significantly more” than anticipated. It will be 2018 before average weekly earnings are increasing at the rate experienced before the financial crisis, the Inflation Report suggested.

Nearly a decade after the start of the financial crisis, the feelgood factor is still pretty muted.
The Bank of England also cut its forecast for growth in 2017 to 2.3% from the 2.6% it was expecting in November. Paul Diggle, an economist from Aberdeen Asset Management, said: “That prodigal first interest rate rise isn’t coming any time soon.
“The Bank of England has made clear that they don’t think growth or inflation is going to do much for a while, so there’s no need to put rates up any time soon.” The minutes of the rate-setting meeting said it was “more likely than not” that its key interest rate would need to increase within two years.
But there were signals that it might not increase rates for the first time until late next year.
Interest rates have been at 0.5% since March 2009. There has not been a member of the rate-setting Monetary Policy Committee (MPC) who has experienced a change in rates since Paul Fisher left in July 2014.

Letter to the Chancellor
With inflation still more than one percentage point off the Bank of England’s 2% target, Governor Mark Carney has had to write another letter to Chancellor George Osborne.
He only has to write once every three months and this is his fifth letter.
In it, he explained that low inflation was mostly due to falling commodity prices, with the oil price down by another one-third since November.

At a news conference, Mr Carney said that there were some positive signs for the UK economy, including that “sterling has fallen 3.5% since November. It’s the largest decline between inflation reports since the crisis.”
A weaker pound makes exported UK goods cheaper for customers overseas. Mr Carney also highlighted that the UK financial system was resilient and in a position to cope with shocks.
He added that all nine members of the MPC believed that the next movement in UK interest rates would be upwards.

Asked about last year’s comment that the decision over whether to raise interest rates would “come into sharper relief” at the beginning of this year, Mr Carney said the decision not to raise rates was an “easy one”.
“Now is not the time to raise interest rates… the economy is using up slack but there is still a bit more to be done there and core inflation, while it’s picked up, hasn’t picked up quite enough,” he said.

Source: BBC