Bank of England Lowers Growth Forecast

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A BBC report today has highlighted that subdued wage growth has contributed to the Bank of England lowering its growth forecast for 2017. The bank edged its growth forecast down to 1.7% from its previous forecast of 1.9% made in May. It also cut its forecast for 2018 from 1.7% to 1.6%. It is also now gloomier on prospects for wage growth and thinks wages will grow by 3% in 2018 down from the 3.5% estimate it made in May. The bank voted 6-2 to keep interest rates on hold at 0.25%. They have been at that level since August last year. Weak wage growth combined with rising inflation has been weighing on the spending power of households.

There has not been a rise since July 2007. Bank of England governor Mark Carney said that business investment was slower than it would have been expected to be, due to Brexit.

“It’s evident in our discussions across the country with businesses… that uncertainties about the eventual relationship are weighing on the decisions of some businesses.
“Investment has been weaker than we otherwise would have expected in a very strong world… So the consequence of that is starting to build… the speed limit of the economy, if you will, has slowed.”

Many economists think the UK could see a move this year and recent speeches by bank officials have raised that expectation. Monetary Policy Committee (MPC) member Andrew Haldane recently said an increase might be “prudent” in the second half of this year.

The bank highlighted that the 18% fall in the pound since November 2015 has been raising the price of imports for the UK, which in turn has been making life more expensive for consumers. Shoppers may have noticed significant increases in the prices of items like butter, meat and computer software. The bank also said there had been evidence that spending on cars, home wares and electrical goods had been falling. It also noted weakness in the housing market and a fall in consumer confidence, which it thinks could indicate that households will curb their spending in the months to come. The bank expects wage growth of just 2% this year, which is well below price inflation currently running at 2.6%. To help bridge the gap between weak wage growth and inflation, consumers have been borrowing more, aided by low rates.

In its report the bank said that interest rates on a £10,000 personal loan are close to record lows. Bank officials have been expressing concern about household debt. Last week, Alex Brazier, the financial stability director, warned that High Street banks risked entering a “spiral of complacency” over mounting consumer debt. Members of the MPC also voted in favour of extending a credit facility to British banks from £100bn to £115bn. The so-called Term Funding Scheme (TFS) runs until February 2018 and has already lent £78bn to banks at close to the bank’s base rate of 0.25%. The TFS is backed by the Treasury.

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