BOE Won't Budge on Rates Until Brexit Is Done, Niesr SaysBy
Sees U.K. inflation peaking at 3.4% while growth slows
Bank of England announces rate decision, forecasts this week
The Bank of England probably won’t make any policy moves before Brexit negotiations are concluded, according to the National Institute of Economic and Social Research.
“We assume that interest rates remain unchanged until we exit the European Union,” Simon Kirby, head of macroeconomic modeling and forecasting at Niesr, told reporters Tuesday. “If the chance of a transitional deal does begin to materialize, it might well be that the Bank of England brings forward the point at which it raises interest rates, but at the moment, that doesn’t appear to be on the cards.”
U.K. Prime Minister Theresa May has just two years to negotiate a new trade deal with the bloc, and there have been early clashes on the rights of EU citizens living in the U.K., the divorce bill, and whether those issues should be resolved before turning to a trade agreement. While the economy has fared much better than anticipated since the referendum so far, reduced trade with the bloc could have implications further down the line.
The BOE, meanwhile, is left with a delicate balancing act. Officials are unlikely to change policy at the next decision on Thursday, but economists say they’ll raise their inflation forecasts and lower their growth predictions. Governor Mark Carney will explain the new projections at a press conference.
In a report published Wednesday, Niesr left its 2017 U.K. growth projection at 1.7 percent and its 2018 forecast at 1.9 percent, though Kirby said that risks are skewed to the downside. The negligible impact on growth from Brexit rests on the assumptions that a free-trade agreement is reached with the EU and there’s no period of transition to the new deal.
Inflation will peak at 3.4 percent at the end of this year, Niesr said, a slight reduction from its last projections but still well above the BOE’s 2 percent target. Those forecasts highlight the challenge facing the BOE of making sure price growth doesn’t get out of control without further damaging output -- all at a time of heightened political scrutiny of the bank.
May’s decision to call a snap general election for June means BOE policy makers are refraining from public speaking, aside from policy-specific communications, until the new government is formed. They’ve also been criticized in the past for being too involved in the Brexit debate, so Carney’s press conference is likely to be subdued.
“What we see over the next couple of years is the failure of wages to keep pace with consumer-price inflation, feeding through into the pinch on households,” Kirby said, and there will be a “sizable reduction” in the contribution from consumer spending to overall growth this year and next.
The big question thrown up by the upcoming general election is whether the government tightens fiscal policy further or creates a new fiscal rule, Kirby said. The current Conservative government has promised to return the public finances to balance in the next parliamentary term, but that will now end three years earlier than when the promise was made, Kirby said.
The U.K.’s fundamental economic problems will probably be ignored in the election, according to Niesr Director Jagjit Chadha. Low productivity growth, which he says “successive governments have failed to address,” could be helped by improving research and development.