The Bank of England's Monetary Policy Committee has kept interest rates and the asset purchase program unchanged, but has revised its growth forecast upward for the U.K.
A report following a meeting of the MPC on Wednesday said the committee voted unanimously to maintain interest rates at 0.25%, and to keep U.K. government bond purchases at £435 billion ($538.2 billion). The bank's total purchase of sterling non-financial investment-grade corporate bonds will also be kept at up to £10 billion.
Coinciding with the release of the committee's February inflation report, the MPC summary said it had increased its central expectation for growth in 2017 to 2%, up from 1.4% in its November report. Growth in 2018 is expected to hit 1.6%, up from 1.5%; and in 2019 is forecast to increase 1.7%, up from 1.6% in the previous report.
“The upgraded outlook over the forecast period reflects the fiscal stimulus announced in the (chancellor of the exchequer's) Autumn Statement, firmer momentum in global activity, higher global equity prices and more supportive credit conditions, particularly for households,” said the MPC in its summary. The MPC added that domestic demand has been stronger than expected over the past few months, and there have been relatively few signs of the slowdown the MPC had anticipated following the U.K.'s referendum in June to leave the European Union.
However, it warned that continued moderation in pay growth and higher import prices due to depreciation of the pound sterling against other currencies “are likely to mean materially weaker household real income growth over the coming few years. As a consequence, real consumer spending is likely to slow,” said the summary.
Sterling has fallen from its peak in November 2015 by 18%, which the MPC warned will lead to an overshoot of the bank's 2% inflation target. The MPC added that “further substantial increases are very likely over the coming months,” noting that inflation rose to 1.6% in December. The MPC expects inflation to rise to 2.8% in the first half of 2018, falling back gradually to 2.4% over three years. The summary noted there are limits to the extent that above-target inflation can be tolerated, and said it will continue to monitor a number of factors to judge “the appropriate policy stance.”
