Bank of England sharply raises economic forecast in Quarterly Report

Governor Carney emphasised that “the Brexit journey really is just beginning” and therefore we think it rash that the Bank of England would countenance raising rates yet.

The BoE upgraded 2017 GDP growth to 2% from November’s 1.4% and August’s 0.8%, and nudged both 2018 and 2019 growth 0.1% higher to 1.6% and 1.75% respectively.

“This stronger projection doesn’t mean the referendum is without effect”, Carney said at a news conference after the BoE left interest rates on hold.

Sterling had been the best performing G10 currency this week in the run-up to the Bank of England’s Inflation Report, but fell 0.5% against the dollar to $1.259 on a lack of any hawkish signs from the Bank.

Bank staff revised down their estimate for the “natural” rate of unemployment to 4.5pc, from a previous projection of 5pc.

Regarding the gloomy predictions made by the bank after the “Brexit” vote, Broadbent said the forecast was based largely on what were seen in survey including of consumers.

“For instance, if spending growth slows more abruptly than expected, there is scope for monetary policy to be loosened”, it said.

“Absent this reassessment of the supply potential of the labor market, an improved demand forecast by itself would have had much more significant upward implications for the inflation forecast”, said Sam Hill, an economist at RBC Capital Markets in London.

“The MPC expect inflation to overshoot the 2% target, however this rise is coming from very low levels and is driven by some temporary factors”.

“At this meeting, all members agreed that it remained appropriate to maintain the stance of monetary policy”. Higher inflation doesn’t seem to be among those concerns. Furthermore, recent statements by Committee members imply a rather compact MPC as the more dovish and the more hawkish members have moved closer to the central consensus. In its final forecasts before the referendum, in May a year ago, the Bank had forecast 2.3% for 2017. Growth of 2.0% is now expected, up from 1.4% in its November report.

According to the regulator, United Kingdom inflation will be two percent this quarter, 2.7 percent in early 2018 and 2.6 percent at the beginning of 2019.

“There are limits to the extent that above-target inflation can be tolerated”, the minutes said. The Bank also noted that United Kingdom growth upgrades were linked to a relaxed United Kingdom fiscal stance, momentum in the global economy, easier credit conditions and strong 2016 GDP growth.