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Published: Tue, May 16, 2017
Economy | By Melissa Porter

Bank of England keeps rates at record low as economy slows


But for now, despite the slightly improved growth outlook beyond 2017, the Bank's inflation report dampened the immediate prospects for the British economy, heightening fears amongst traders of slower economic growth from softer consumer spending. Carney said the BoE had not made forecasts based on the scenario of a "disorderly Brexit" where Britain crashes out of the European Union without an agreement on future relations.

The central bank noted that aggregate demand slowed in the first quarter, with the slowdown concentrated in consumer-facing sectors.

The year over year figure came in at +2.3%, down from +3.0% in February and below the median forecast for 1.9% year over year growth.

But as official data has soured since the start of the year, many economists expect tougher times ahead as Prime Minister Theresa May starts two years of fraught Brexit talks before the country leaves the European Union at the end of March 2019.

Since the Brexit vote, economists have warned about a potentially rapid slowdown in consumer spending, as Brexit-driven inflation starts to impact the ability of British households to spend money on non-essential items like clothing and eating out.

His predication came as the Bank kept interest rates on hold at 0.25 per cent and nudged down its growth forecast to 1.9 per cent for 2017 from two per cent in February.

The central bank sees annual inflation peaking in 2017 at 2.8%-well in excess of its 2% target-before easing off in 2018.

In the latest quarterly inflation report, which is published every three months on a "Super Thursday", the Bank slightly raised its growth forecasts for the United Kingdom economy for 2018 and 2019 to 1.7% from 1.6% in February's projection.

The MPC only had eight members in this month's meeting as it is yet to replace Charlotte Hogg, former deputy governor who resigned in March. Weakness in productivity growth and a continuing drag from slack have contributed to this softness, but they can not explain its full extent.

This could imply the BoE will raise rates for the first time since 2007 just as Britain leaves the EU. Importantly, they also note that monetary policy "could need to be tightened by a somewhat greater extent" than the path implied by markets.

The monetary policy committee was split for its second meeting running over the rates decision, with Kristin Forbes again voting against the other seven members and calling for an immediate rise to 0.5% to keep rising inflation in check.

Even if there is eventually a smooth Brexit process - which is obviously questionable - we suspect that the twists and turns in getting there will cause serious uncertainties that hamper business investment and very possibly willingness to employ.

Should the forecasts come in line with projections, the BoE's monetary policy committee would need to raise rates faster than markets are now pricing in, added Mr Carney.

Against the euro, the pound was trading 0.3 per cent down at 1.18 euro.

However, forecasts for 2018 and 2019 were revised up from 1.6 per cent and 1.7 per cent to 1.7 per cent and 1.8 per cent respectively.

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