The Bank of England has trimmed its UK growth forecast for 2017 this year, saying that household spending is slowing more quickly than expected.
It said consumers were being squeezed between sluggish income growth and rising inflation, and that could be seen in weak retail sales and a sharp fall in new car registrations in April.
The Bank trimmed its growth forecast to 1.9% from its previous estimate of 2.0% made in February.
It also held interest rates at 0.25%.
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Interest rates are set by the Bank’s Monetary Policy Committee (MPC), which is tasked with keeping inflation at 2%.
However, in its Quarterly Inflation Report published on Thursday the Bank raised its forecast for inflation this year to 2.7% from its February forecast of 2.4%.
It said that this overshoot was “entirely” due to the impact of weak sterling and that raising interest rates would not be an effective way of tackling that inflation.
Before last June’s referendum the pound was trading at about $1.47. It is currently trading around $1.29, down 12%.
The Bank also highlighted that its current forecasts were based on the assumption that “the adjustment to the United Kingdom’s new relationship with the European Union is smooth”.
Since the MPC’s previous interest rate meeting in March, official figures have indicated that the economy is weakening. The economy grew by 0.3% in the first quarter of 2017, a sharp slowdown from the 0.7% growth rate in the final three months of 2016.
“The slowdown appears to be concentrated in consumer-facing sectors, partly reflecting the impact of sterling’s past depreciation on household income and spending,” the Bank said in its report.
It says that consumption growth will be “slower in the near-term than previously anticipated”, but then forecasts that it will recover over the next two years as income growth picks up.
The Bank forecasts that average weekly earnings will grow at a rate of 2% this year, but rising to 3.75% by 2019.
Instead of its usual nine members, the MPC only had eight members attending the May meeting, as the Bank is yet to replace Charlotte Hogg, its former deputy governor. She resigned in March after failing to disclose that her brother was a senior executive at Barclays.
At the May meeting, Kristin Forbes was the only member to vote in favour of rise in interest rates. Other members were more cautious, with concerns over slower consumer spending and other trends.
Adam Chester, head of economics at Lloyds Bank Commercial Banking, said the central bank’s assessment “was more hawkish than expected”.
He added that the MPC “explicitly noted that, if the economy evolved as expected, interest rates would likely have to rise more sharply over the coming years than the markets were discounting”.
However, sterling fell after the bank’s announcement as investors speculated that interest rates were unlikely to rise any time soon. The pound fell 0.63% against the dollar and was 0.46% down on the euro.
Source: BBC News