At the Monetary Policy Committee’s last meeting, in March, Kristin Forbes voted for a rate hike and some other members were close to joining her.
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Although the fall in the pound has boosted the United Kingdom manufacturing sector to a three-year high-with domestic orders and exports both on the up-manufacturing accounts for only around 10 percent of United Kingdom economic output.
It also downgraded its GDP forecast to 1.9%, from 2%, and left its Quantitative Easing programme unchanged.
“Cut growth forecasts and raised inflation guidance is likely what’s on the cards, something that would put further pressure on Carney and Co.to tighten monetary policy, and therefore could end up benefiting the pound”, said Connor Campbell, financial analyst at Spreadex, in a note.
With only a month until a national election, the Bank said the short-term squeeze on households from inflation since June’s Brexit vote would be more severe than it predicted in February, with price growth peaking at over 2.8 percent late this year.
Recent analysis of the British economy shows that living standards are declining in the wake of last June’s Brexit referendum.
Faced with Brexit unknowns, a national election and mixed economic data, Bank of England Governor Mark Carney and his colleagues will probably say on Thursday they want more clarity before paving the way for the first interest rate hike in almost a decade. Rising consumer prices are squeezing households and the economy grew just 0.3 percent last quarter, the weakest in a year.
“Other surprises could be an update to inflation or growth forecasts”.
And it enjoyed another reprieve yesterday, hitting a three-week high versus the euro and climbing towards $1.30 as traders awaited this week’s Bank of England inflation report and policy meeting.
Inflation forecasts have also been mildly adjusted with the BOE bringing forward its expectations for consumer price inflation (CPI) to peak over the forecast period in the final quarter of this year at around 2.8 percent, as opposed to its earlier estimate that the highest point would be reached in the second quarter of 2018. However, the Bank also warned that rates may have to rise sooner and faster than the market now expects. The latest figures show that economic growth has declined more than expected, inflation is rising, and real wages are falling.
The Bank of England said it may need to raise interest rates faster than the market suggests, assuming that Brexit goes well.
However, the committee said monetary policy may need to be tightened more than the markets expect over the next three years.
Yesterday, the pound to dollar exchange rate pushed $1.30 after the unexpected announcement from the White House that FBI Director, James Comey had been removed from his position. This makes the trade-off faced by the MPC trickier, but we expect that the core neutral stance will hold this time’.
“We also think Brexit uncertainties will hamper growth”. The MPC is temporarily down to eight members following the resignation of Charlotte Hogg as BoE deputy governor after claims she overlooked a conflict of interest.
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The minutes repeated a statement made in May that for those voting to keep interest rates on hold “it would take relatively little further upside news on the prospects for activity or inflation for them to consider that a more immediate reduction in policy support might be warranted”.
