BoE Cuts Growth Forecasts

The Bank of England revised down its GDP growth estimates for the next three years and signaled a rate rise may not occur until mid-2016, according to latest Inflation Report released on May 13th.

The central bank cut 2015 growth forecast from 2.9 percent to 2.5 percent while projections for 2016 and 2017 were also lowered by 30 basis points to 2.6 percent and 2.4 percent respectively. 

Regarding inflation, policymakers increased its 2015 forecast to 0.6 percent from 0.5 percent and cut the 2016 estimate to 1.6 percent from 1.8 percent. 2017 forecast was left unchanged at 2.1 percent.

Excerpts from BoE Inflation Report, May 2015:

Growth is projected to be at or a little below its historical average rate throughout the forecast period, although remaining slack in the economy is absorbed.

World GDP growth is projected to pick up slightly over the forecast period, broadly unchanged from the February Inflation Report. While ECB policy actions should support euro-area growth, the possibility of a disorderly resolution of Greek debt negotiations is considered to pose a downside risk to the world and UK growth outlook. Globally, a normalisation in US monetary policy could be associated with volatility in financial markets and a knock-on impact on global activity.

Domestically, the projection is for solid demand growth. The boost to household spending from lower energy and food prices is sustained by a pickup in wage growth. Business investment growth remains robust, reflecting the low cost of finance and the broader recovery in demand. Supply growth is supported by a gradual pickup in productivity growth. There remain considerable uncertainties around the timing and extent of that pickup.

In the very near term, inflation is projected to remain close to zero, as the past falls in food, energy and other goods prices continue to drag on the annual rate. Towards the end of 2015, inflation rises notably, as those effects begin to drop out. As the drag from domestic slack continues to fade, inflation is projected to return to target within two years and to move slightly above the target in the third year of the forecast period.

The path for inflation depends crucially on the outlook for domestic cost pressures. A tightening of the labour market and an increase in productivity should underpin wage growth in the period ahead. There is a risk that the temporary period of low inflation may persist for longer — for example, if it affects wage settlements.

Alternatively, wages could pick up faster as labour market competition intensifies, which could pose an upside risk to inflation. Inflation will also remain sensitive to further movements in energy and other commodity prices, and the exchange rate.

The MPC considers that on balance these factors point to downside risks to the inflation outlook in the first half of the projection, relative to the central path. Inflation is judged as likely to be above as below the 2% target by early 2017, with the likelihood of inflation being above the target then rising a little further.

BoE Cuts Growth Forecasts

BoE | Joana Taborda |
5/13/2015 3:12:57 PM