Bank of England maintains rates, revises up growth forecasts

A bus carries passengers past the Bank of England in London on Thursday July 14, 2016. (AP / Adela Suliman)

LONDON -- The Bank of England revised up its growth forecasts for the British economy for this year and next as it opted against another interest rate reduction in the wake of the country's decision to leave the European Union.

Conceding that its earlier predictions over the immediate impact on growth stemming from the Brexit vote were too gloomy, the bank's policymaking Monetary Policy Committee decided Thursday to keep its main interest rate at a record low 0.25 per cent.

The decision was unanimous among the nine-member panel and came as the pound surged to near month-highs against the dollar following a court ruling that the government can't trigger the Article 50 process for Brexit without Parliament's involvement.

It also came in the wake of recent figures showing that Britain's economy grew by a forecast-busting quarterly rate of 0.5 per cent in the July-September period and amid growing signs of a marked pick-up in inflation.

The British economy has showed unexpected resilience following the Brexit vote. Growth has been stronger than many economists, including forecasters at the Bank of England, had anticipated. Many had warned that growth would slow dramatically after the June 23 vote to leave the EU, a decision which spurred the bank to cut rates for the first time in more than seven years and expand its economic stimulus program in August.

The bank's governor, Mark Carney, said much of the resilience that's been exhibited has centred on households seemingly ready to "entirely look through Brexit-related uncertainties" -- for now.

"For households, the signs of an economic slowdown are notable by their absence," Carney told a briefing after the interest rate decision. "Perceptions of job security remain strong. Wages are growing at around the same modest pace as the start of the year. Credit is available and competitive. Confidence is solid."

In light of all the new information to hand, the Bank revised up its growth forecasts for the coming two years in the quarterly economic forecasts that accompanied the rate decision. Instead of 2 per cent growth this year, it's now penciling in 2.2 per cent. And next year, it's now penciling in growth of 1.4 per cent instead of 0.8 per cent.

However, the bank cut its 2018 growth forecast from 1.8 per cent to 1.5 per cent -- a sign that the Bank thinks the post-Brexit fallout has merely been postponed rather than erased.

Carney said volatility and uncertainty would govern the process of Brexit, even as he underlined that the negotiations have not yet begun.

"That uncertainty does bear down on business investment," he said. "That does build with time."

The main uncertainty centres on what Britain's break from the EU will look like.

The impact of leaving Europe's single market of more than 500 million people could be felt far and wide in Britain. London's pre-eminent financial services companies could lose automatic access to operate in the other EU countries. And foreign firms -- not just banks -- could halt investments or even abandon their British bases in favour of new ones within the European single market.

Carney also noted the bank's concern with rising inflation, which if left unchecked could have profound effects on living standards and even prompt the Bank of England to reverse course and start raising interest rates. Carney said the bank now had a neutral bias in terms of interest rates -- the next could be up or down.

While growth has surprised to the upside, possibly as a result of the export-boosting fall in the British pound, inflation pressures in the British economy are rising. Though a lower pound makes British exports more competitive in international markets, it has the potential to stoke inflation by raising the cost of imports, such as oil and food. The Bank is anticipating that inflation will rise to 2.7 per cent next year, which is way higher than the current 1 per cent rate and above the central bank's target of 2 per cent.

Policymakers said they are "monitoring closely the evolution of inflation expectations" and that they were willing to "accommodate a period of above-target inflation." However, Carney said there was a limit to how far they would allow inflation to overshoot target.

Economists have warned the real test to the British economy will come in March, when Prime Minister Theresa May plans to formally notify the EU of Britain's intention to leave. That will trigger at least two years of negotiations which will highlight threats to the economy, the biggest of which is the possible loss of tariff-free access to the single market.

"The activity data has been better than was expected, and with sterling (the pound) having cratered and inflation already picking up, this wasn't really the time to cut," said Aberdeen Asset Management Senior Economist Paul Diggle.

The pound has borne the brunt of market unease over the Brexit vote, losing almost a fifth of its value.

However, on Thursday, the pound enjoyed one of its best days since the vote when it surged after the court ruling that lawmakers have to have a say on invoking the Article 50 process that formally starts the two-year countdown to Britain's exit from the EU and the start of likely-tough negotiations.

The pound was up 1.2 per cent at $1.2442, around half a cent lower than its earlier session high.

Many in the markets hope that the court ruling will at the least delay the process of Britain's exit from the EU or diminish the government's ability to push through a so-called "hard Brexit," which would see Britain leave the single market. There are some in the markets who even hope it may scupper Brexit completely.

"If it looks like there is a chance that Article 50 may not be triggered then we could see a large turnaround for the pound," said Kathleen Brooks, research director at City Index.

Carney described the court decision as an example of the ups and downs to come.

"It's an example for the uncertainty that will govern this process," he said.