BoE cuts growth, wage forecasts as key rate kept at record low

London - The Bank of England (BoE) cut its forecasts for economic growth and wages as it extended keeping its benchmark rate at a record low.

The downgrades, linked to Brexit, were enough for the majority of the Monetary Policy Committee keep their cautious stance, with the vote for no change coming in as expected at 6-2. Ian McCafferty and Michael Saunders maintained their push for a 25 basis-point increase, which would reverse the rate cut put in place a year ago this week.

The new forecasts reflect the deterioration of the economic outlook since May as faster inflation outpaces wage gains, holding back consumer spending. While the bank sees the weaker pound and stronger global growth bolstering exports, uncertainty surrounding the UK’s talks to leave the European Union is creating a drag.

But the bank also said that a response to above-target inflation and domestic price pressures will be needed. If the economy performs as it expects, the benchmark interest rate will need to rise by a “somewhat greater extent” than markets currently anticipate, it said.

The BoE’s forecasts continue to assume a smooth Brexit and are based on a rate hike fully priced in by the third quarter of 2018. It now projects economic growth of 1.7% this year and 1.6% in 2018, down from 1.9% and 1.7%.

There’s little sign so far that wage growth is picking up, even with unemployment at the lowest since the 1970s.

Underlying the squeeze on households from inflation, real wages will fall by 0.5% this year, according to BoE’s new forecast. Average weekly earnings will improve in 2017, but at a slower pace than previously thought.

Given weak productivity, the BoE still sees economic growth being enough to generate domestic inflation pressure and close the UK’s output gap within three years. Inflation, which will peak at about 3% in October, will slow to around 2.2% in 2020, just above the bank’s 2% target.

The BoE unanimously agreed to keep its gilt and corporate bond programs unchanged after this week’s meeting.

The MPC also announced a rare fourth policy vote on Thursday, deciding that it won’t extend the Term Funding Scheme, which was part of its Brexit stimulus package.

The programme was aimed at ensuring its rate cut was passed on to consumers and businesses by giving banks cheap funds. Its popularity - almost £80bn has been borrowed already - means the bank is increasing the size of the financing to £115bn from £100bn.

The decision comes as the BoE warns about the pace of consumer credit growth and the potential risks to the economy. It’s already said it will increase capital requirements for UK lenders and is closely scrutinizing underwriting standards.

The BoE will continue its policy of reinvesting the proceeds of maturing gilts held as part of QE, with just over £10bn due this month and next. It will also reinvest corporate bond cashflows, though will wait until it has enough to allow an auction, which may not happen until late 2019.

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