After voting to hold interest rates, Bank warns rising prices and weak wage growth will continue to squeeze living standards
Brexit uncertainties have discouraged some firms from awarding pay rises, the Bank of England has said, as it warned that rising prices and weak wage growth would continue to squeeze living standards this year.
The Bank’s rate-setting committee voted by 6-2 to leave official borrowing costs at their all-time low of 0.25%, according to minutes from their meeting released on Thursday. But they hinted that rates would have to rise over the coming year to keep inflation in check.
The Bank presented new forecasts for the UK economy alongside its rates decision. It cut the growth outlook for this year and next, raised its inflation forecast for the months ahead and cut its predictions for wage growth.
Presenting the forecasts, the Bank’s governor, Mark Carney, said the pound’s sharp fall after the Brexit vote had raised the cost of imports to the UK and consumers were feeling the pain of higher prices.
“We think we are in the teeth of this right now so, over the course of the next quarters, it will continue to feel like this but as we move into the new year, we’ll see the inflation start to come down and household income start to go up,” he said.
He noted that there were signs the uncertain outcome of Brexit negotiations was affecting firms’ plans to invest and to award pay rises.
“It is evident that uncertainties about the eventual relationship are weighing on the decisions of some business. We see it directly in the macroeconomic numbers, investment has been weaker than we otherwise would have expected,” said Carney.
Asked about the tepid outlook for pay growth, he said the UK’s weak productivity was a key factor and that Brexit also played a role.
“What we are picking up across the country, in a number of firms, is that there is an element of Brexit uncertainty which is affecting the wage bargaining. Some firms, a potentially material number of firms, are less willing to give bigger pay rises given it’s not as clear what their market access is going to be over the course of the next few years,” said Carney.
Despite the weaker outlook for growth, the Bank appeared to send a clear message to businesses and households that they should not expect borrowing costs to stay at their record low for much longer.
The meeting minutes noted that if the economic picture evolved as the Bank was predicting, interest rates could be raised by more than financial markets are currently pricing in. Those market expectations are for two rises to 0.5% and then to 0.75% over the next three years.
The minutes said: “If the economy were to follow a path broadly consistent with the August central projection, then monetary policy could need to be tightened by a somewhat greater extent over the forecast period than the path implied by the yield curve underlying the August projections.
“All members agreed that any increases in Bank rate would be expected to be at a gradual pace and to a limited extent.”
In the Bank’s economic forecasts released on Thursday, key points included:
• GDP growth now expected to be 1.7% in 2017, down from 1.9% predicted in May
• GDP growth in 2018 expected to be 1.6%, down from 1.7% predicted in May, with the 2019 growth prediction left at 1.8%
• Inflation in the third quarter of this year expected to average 2.7%, up from 2.6% predicted in May
• Average earnings growth predicted to be 2% in 2017, unchanged from May’s forecast, but 2018 earnings growth expectations cut to 3% from 3.5% and 2019’s to 3.25% from 3.75%
Two members of the monetary policy committee, Ian McCafferty and Michael Saunders, wanted to put rates back to 0.5% immediately to curb inflation.
The government sets the Bank an inflation target of 2% but the rate is currently above that at 2.6%, with policymakers expecting it to pick up and peak at about 3% in the autumn on the consumer price index (CPI) measure.
But the other six members of the committee felt it was better to wait before reversing the emergency cut it made to borrowing costs in the aftermath of the Brexit vote a year ago.
Carney’s account of what firms had been saying to Bank officials on pay and Brexit uncertainty may upset leave supporters. The governor drew criticism in the run-up to the EU referendum when he said there was a risk a vote for Brexit could spark a recession and raise unemployment.
But remain supporters seized on Carney’s comments as evidence that the government’s approach to Brexit was not working.The former shadow business secretary Chuka Umunna said it was “more evidence of the cost of hard Brexit [that] the Bank of England forecasts lower growth and higher inflation”.
The Labour MP Peter Kyle called on the government to urgently answer the question of what benefit Brexit would bring if it was forecast to leave us poorer.
But John Longworth, co-chair of the Leave Means Leave group and former chief of the British Chambers of Commerce, said the Bank was “historically bad at forecasting”.
August 3rd, 2017: Guardian