The Bank of England has decided to maintain the interest rate at 0.25% and upgrade its growth outlook for the UK economy.
The nine members of the Bank’s Monetary Policy Committee voted unanimously to keep interest rates at the record low of 0.25%.
The Bank raised its growth forecast to 2% for 2017, up from 1.8% in November. The economy is expected to slow in 2018 with growth dropping to 1.6%, before edging up slightly to 1.7% in 2019.
It said that that the improved outlook was to reflect the fiscal stimulus announced by Chancellor Phillip Hammond in the Autumn Statement, improved global economic activity, rising stock markets and more supportive credit conditions for households.
“Domestic demand has been stronger than expected over the past few months, and there have been relatively few signs of the slowdown in consumer spending that the Committee had anticipated following the referendum,” the Bank said.
The value of sterling remains 18% below its peak in November 2015 and has fallen below $1.20 since the referendum. It is currently valued at $1.26.
In the minutes of the meeting, the Bank said that it expects inflation to rise “markedly” above the 2% target over the coming months as a result of the weakness in the pound.
A fall in the pound leads to higher import costs which boost consumer prices and cause inflation to increase.
Inflation is predicted to rise to 2% in February, hitting 2.8% in the first half of 2018. It is then expected to fall back to 2.4% in three years’ time, before returning close to the target over the subsequent year.
The Bank reiterated its view that there were limits to the extent that above-target inflation of 2% could be tolerated.
The minutes said that some members felt “the risks around the trade-off” between achieving growth and meeting the inflation had moved a “little closer to those limits”, suggesting they could be voting for an interest rate rise in the near future.
Howard Archer, chief economist at IHS Global Insight, said: “The general tone of the Bank of England’s analysis reinforces our belief that the next move in interest rates will be up – but we do not see this happening before 2019.
“We do not believe even the upgraded Bank of England growth forecasts warrant higher interest rates given the major uncertainties facing the UK economy and it is notable that the Bank of England still expects growth to moderate in 2018 and to be relatively limited in 2019. Also influencing our view is that we suspect that the Bank of England’s growth forecasts will turn out to be too optimistic.
“However, given major uncertainties over the UK economic outlook as Brexit gets underway and develops, nothing can be ruled out.”
John Phillips, group operations director at Just Mortgages and Spicerhaart, said: “The Bank of England has upgraded growth forecasts and has left interest rates on hold which is good news for mortgage customers and suggests that fears of a Brexit slump are gradually being pushed aside.
“However, the Bank still expects a hit to the UK economy. Further substantial increases are likely in the coming months for inflation and the Bank could respond in either direction, dependent on changes to the UK’s economic outlook.
“It is likely that many households will experience a major squeeze on incomes due to rising inflation. This could impact consumer spending as well as housing supply if home movers wait to see the lay of the land before putting their homes up for sale. Due to the Bank’s decision to hold the base rate, borrowers must now look to take advantage of the low rate environment in order to save themselves a significant amount of money by remortgaging.”
