The Bank of England may be about to raise its economic outlook for the second time since the Brexit vote, reflecting a resilience in the UK economy that has seen governor Mark Carney criticised for over-egging the threats from the decision to leave the European Union.
As the Bank of England prepares to publish to new forecasts in three weeks, its first in 2017, the governor said recent data is “consistent with some further upgrade.
“The monetary policy committee [MPC] lifted its projections in November after slashing the outlook three months earlier. This is about the near-term strength of the economy, which is absolutely welcome,” Mr Carney told MPs in London on Wednesday. That economic strength has emboldened Mr Carney’s critics after the Bank of England predicted a sharp slowdown from Brexit last year. The governor said it was no longer the biggest risk to financial stability – partly thanks to the bank’s steps – though the exit process from the EU has the potential to amplify certain weak spots in the economy.
UK prime minister Theresa May has said she will trigger the process for formal talks by the end of March. The Bank of England currently expects growth of 1.4 per cent this year, down from 2.2 per cent in 2016, and Mr Carney said that Brexit will probably still drag on the expansion.
Forecasts
After the last forecasts were issued in November, policymakers said the next interest-rate change could be up or down. But with the downturn now looking much less sharp, and sterling’s depreciation pushing up inflation, many economists say that means the next move – when it comes – could be a hike. Consumer-price growth is forecast to breach the Bank of England’s 2 per cent target in the next quarter, and Mr Carney said the UK is already seeing a “notable”’ pickup.
Traders see the probability of a rate increase by the end of 2017 at 25 per cent, up from 20 per cent at the start of the year. Investors are pricing in zero chance of a loosening. “The data has been incredibly strong,” said Liz Martins, an economist at HSBC Holdings. “Also we’ve had a bit of a global upswing as well, which is supporting the UK.”
Bank of England staff start drawing up the quarterly forecasts weeks before policymakers publish the inflation report, with the next one due on February 2nd. The MPC will start meetings later this month to make the interest-rate decision that will be announced on the same day.
Mr Carney on Wednesday gave a signal of another potential response to the stronger outlook, saying there “will be a case” for the financial policy committee to raise the countercyclical capital buffer applied to lenders for UK exposures if the economy continues to perform as it has in recent months.
Mr Carney said the risk analysis around Brexit was right at the time – the morning after the vote, policymakers pledged to provide an additional £250 billion (€235 billion) to the financial system. – (Bloomberg)
