BOE to Cut Growth Forecasts as Rate-Increase Chances Diminish

(Bloomberg) -- Mark Carney signaled in June that a Bank of England rate increase may be approaching. Economists doubt it’s here just yet.

The governor, overseeing an economy that slowed sharply in the first half, will probably lower growth projections for the next two years when he presents the central bank’s latest forecasts next week, according to economists. The inflation outlook is expected to be unchanged.

In addition to a loss of economic momentum, wage growth has disappointed this year, damping speculation that policy makers will raise interest rates any time soon to tackle faster-than-targeted inflation. The economy is too brittle to absorb tighter policy, and more knowledge of the details of the U.K.’s exit from the European Union is required before officials will act, according to analysts at Citigroup Inc.

“Even a small rate hike could have repercussions for financial conditions and the economy in its current fragile state,” economists Christian Schulz and Ann O’Kelly said in a note to clients on Friday. “Until there is more clarity about the Brexit deal, which is unlikely before March 2019, the BOE will probably abstain from adding to that fragility by hiking.”

Economists predict the BOE will keep its key interest rate at a record-low 0.25 percent and leave the size of its quantitative-easing program unchanged on Aug. 3. Alongside the announcement, the Monetary Policy Committee will update forecasts in its quarterly Inflation Report, and Carney is due to hold a press conference to explain the decision. Investors will scour his comments for clues on his latest thinking on the potential longer-term threats from Brexit.

At their last meeting in June, policy makers surprised investors when three out of the eight voters dissented in favor of higher rates and a fourth subsequently suggested he might follow suit. Since then though, the Office for National Statistics said there’s been a “notable slowdown” in the economy and inflation retreated from its recent high.

Analysts see the BOE keeping its key rate on hold until mid-2019, according to a Bloomberg survey. Investors place odds of less than 40 percent on a rate increase this year, down from almost 60 percent a month ago.

All but one out of 19 economists in the Bloomberg survey see the MPC cutting its growth forecast for this year next week, while the majority also see the panel lowering its projection for 2018. However, most see the bank leaving its estimates for inflation unchanged for both years.

In its last forecasts in May, the BOE projected growth of 1.9 percent this year and 1.7 percent in 2018, with inflation at 2.8 percent and 2.4 percent respectively.

To contact the reporters on this story: Scott Hamilton in London at shamilton8@bloomberg.net, Harumi Ichikura in London at hichikura@bloomberg.net.

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