Faster Inflation Won't Change BOE Minds as U.K. Growth Softens

(Bloomberg) -- Don’t expect any change of heart among Bank of England policy makers just yet.

While the central bank will lift its 2017 inflation forecasts and lower its growth projections this week, according to economists surveyed by Bloomberg, that won’t transfer into more votes for an increase in interest rates. Just one policy maker is expected to dissent, with Kristin Forbes the likely candidate after she voted against her colleagues in March, citing the outlook for above-target inflation.

The Monetary Policy Committee, short a member after the resignation of Deputy Governor Charlotte Hogg in March, will announce its decision and updated economic projections at noon on Thursday in London. Governor Mark Carney will hold a press conference 30 minutes later, marking the first comments from an MPC member since the BOE went into pre-election purdah last month.

In March, some of the MPC majority said it might not take much more strength in either inflation or growth for them to also shift to Forbes’s view. 

Yet while the BOE may raise its 2017 inflation forecast from 2.7 percent in February, worse than expected growth will likely stay its hand. Gross domestic product increased 0.3 percent in the first quarter, its worst performance in a year, and half the pace of the last three months of 2016.

“Given the evolution in these projections, we do not envisage anyone else joining Kristin Forbes in voting for a rate hike, even though we know that there were ‘some members’ who sympathized with her position,” said Alan Clarke, an economist at Scotiabank in London. “The disappointing first-quarter GDP reading will also have tempered those tempted to join Camp Hawk.”

While the first-quarter GDP report is based on only 44 percent of the information that will ultimately be available and could be revised higher, Bloomberg’s monthly survey shows no pickup through the rest of the year. It predicts an annual expansion of 1.7 percent, compared with the BOE’s last set of Inflation Report projections which saw the U.K. economy growing 2 percent this year.

“GDP disappointed in the first quarter, and this is likely to show up in a weaker near-term profile for growth,” said Nomura economist George Buckley. “For the time being we retain our view of no tightening until the second half of 2019.”

To contact the reporters on this story: Lucy Meakin in London at lmeakin1@bloomberg.net, Joshua Robinson in Amsterdam at jrobinson37@bloomberg.net.

To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Fergal O'Brien