The Bank of England has painted a brighter outlook for the UK economy this year, with faster growth, lower unemployment and a more modest rise in inflation.
After further signs that consumers and businesses have shrugged off the Brexit vote, the Bank revised its earlier gloomy forecasts to predict the economy would grow 2% this year – matching its 2016 performance.
That forecast was above the 1.4% figure policymakers had pencilled in for 2017 in November. It was also in stark contrast to the sharp slowdown predicted by the Bank and others in the immediate aftermath of the vote to leave the EU.
But despite more optimistic forecasts, the central bank highlighted risks ahead. It expects business investment to fall and consumer spending to slow as rising inflation eats into household budgets. It also raised concerns about households becoming overstretched, as it predicted people would use savings to spend.
At its rate-setting meeting the Bank’s monetary policy committee, led by governor Mark Carney, voted unanimously to hold interest rates at the record low of 0.25% and to continue with a programme of electronic money printing known as quantitative easing.
Presenting the Bank’s forecasts, Carney said that plans for more government spending, stronger world growth and other factors had made policymakers more upbeat. He conceded the Bank had been too gloomy on the prospects for consumer spending since the Brexit vote. “Growth has remained resilient since the referendum,” he told a news conference.
But he flagged potential challenges ahead and sought to emphasise that the Bank could still move interest rates in either direction.
“The Brexit journey is just beginning. While the direction of travel is clear, there will be twists and turns along the way. Whatever happens, monetary policy will be set to return inflation sustainably to target while supporting the necessary adjustments in the economy,” Carney said.
Minutes from the rate-setting meeting revealed that some members of the nine-strong committee were growing more worried about inflation, which has been rising as the weak pound pushes up import costs.
The Bank’s forecast for inflation, however, was little changed from its last outlook in November. That was largely because it now believes unemployment can fall further than previously thought before wages start to accelerate.
That relatively benign inflation outlook helped push the pound down, with investors seeing less reason for interest rates to be raised to keep prices rises in check.