LONDON • Mark Carney said Brexit will continue to take a toll on UK investment and growth, and the Bank of England’s (BoE) assumption of an orderly divorce from the European Union (EU) will be put to the test.
The BoE governor’s comments come after signs of slow progress in the initial round of exit talks, as well as government squabbling after a poor election result in June.
The central bank cut its forecasts for economic growth and wages and kept its benchmark rate at a record low. The predictions continue to assume a smooth Brexit and are based on a rate hike fully priced in by the third-quarter of 2018.
The bank’s latest forecasts factor in “uncertainty about the eventual shape of the UK’s economic relationship with the EU”, which “weighs on the decisions of businesses and households and pulls down both demand and supply”, Carney said at a press conference yesterday, speaking after the BoE’s policy announcement.
As the Brexit negotiations proceed, “the assumption of a smooth transition to a new economic relationship with the EU will be tested”, he said.
The central bank now projects economic growth of 1.7% this year and 1.6% in 2018, down from 1.9% and 1.7%. The downgrades were enough for the majority of the Monetary Policy Committee (MPC) to keep their cautious stance, with the vote for no change coming in as expected at 6-2.
Ian McCafferty and Michael Saunders maintained their push for a 25 basis-point increase, which would reverse the rate cut put in place a year ago this week.
The British government has until March 2019 to negotiate its divorce and a new trade deal with the EU, or a transition to that new relationship.
Talks are on hold until the end ofAugust, though they’ve been off to a rocky start, with both sides clashing on issues which must be resolved before negotiations can turn to trade.
Carney said that at the moment, the bank does “not see any material evidence” that businesses “think that the transition would be anything but smooth”.
The new forecasts reflect the deterioration of the economic outlook since May as faster inflation outpaces wage gains, holding back consumer spending. While the bank sees the weaker pound and stronger global growth bolstering exports, uncertainty surrounding the UK’s talks to leave the EU is creating a drag.
There’s little sign so far that wage growth is picking up, even with unemployment at the lowest since the 1970s.
Underlying the squeeze on households from inflation, real wages will fall by 0.5% this year, according to BoE’s new forecast. Average weekly earnings will improve in 2018, but at a slower pace than previously thought.
Given weak productivity, the BoE still sees economic growth being enough to generate domestic inflation pressure and close the UK’s output gap within three years. Inflation — which will peak at about 3% in October — will slow to around 2.2% in 2020, just above the bank’s 2% target.
The BoE unanimously agreed to keep its gilt and corporate bond programmes unchanged after this week’s meeting.
The MPC also announced a rare fourth policy vote yesterday, deciding that it won’t extend the Term Funding Scheme, which was part of its Brexit stimulus package.
The programme was aimed at ensuring its rate cut was passed on to consumers and businesses by giving banks cheap funds. Its popularity — almost £80 billion (RM453.6 billion) has been borrowed already — means the bank is increasing the size of the financing to £115 billion from £100 billion.
The decision comes as the BoE warns about the pace of consumer credit growth and the potential risks to the economy. It’s already said it will increase capital requirements for UK lenders and is closely scrutinising underwriting standards.
The BoE will continue its policy of reinvesting the proceeds of maturing gilts held as part of quantitative easing, with just over £10 billion due this month and next. It will also reinvest corporate bond cashflows, though will wait until it has enough to allow an auction, which may not happen until late 2019. — Bloomberg