REPORT
By Gökhan Kurtaran
London letter, Feb. 13

-Bank of England growth predictions fails to hit target

Bank of England (BoE) Governor Mark Carney’s has often been accused of scaremongering because of his pessimistic forecasts over the post Brexit U.K. economy by the leave camp.  Despite increased volatility of the sterling and slowing growth, the U.K. economy performed better than expectations and showed considerable resilience. This ensured that the BoE updated the gloomy post-Brexit forecasts for the economy.

Following the historic EU referendum the bank had cut U.K. economic growth forecast for 2017 down to 0.8 percent. However, in last November's Inflation Report it raised the projection to 1.4 percent. Finally in the first week of this month, the BoE raised the U.K. growth forecast again to 2 percent for 2017.  With the latest upgrade, it represents one of the biggest six-month changes in the Bank's forecast on record.

It is noteworthy that the bank’s governor often referred to the Brexit as “the biggest domestic risk to financial stability” and before the referendum he was often accused of damaging investor’s confidence in the fastest growing economy of G-7. He may well be right about the heightened uncertainty over the U.K.’s economy, however it is evident that leaving the union may not be as destructive as it appears. Despite pressures over the sterling, and the purchasing power of import-dependent industries and retailers as well as slowing consumer demand, British car manufacturing has hit a 17-year high and unemployment is at an 11-year low.

It is a critical time now for the BoE to analyze the current situation and make better projections over the economic outlook to provide more reliable guidance for investors and the markets.

A Bloomberg survey showed that 87 percent of analysts think that the BoE’s next move will be an interest rate hike, up from 65 percent a month earlier. According to the senior market strategist of London Capital Group, İpek Ozkardeskaya, “the BoE will more likely remain neutral in the medium term as Britain exits the European Union, yet the leading macro-metrics are the major motives for the short-term shift in expectations. In this respect, inflation is important data to watch.”

This month the Monetary Policy Committee (MPC) of the bank voted to leave interest rates unchanged at their record low of 0.25 percent, though the minutes said that there were limits about how much inflation could be tolerated, and that some of the MPC's nine members felt "they had moved a little closer to those limits." The Bank also said it expects inflation to grow at a slower pace than predicted in its last forecast, peaking at 2.7 percent next year rather than 2.8 percent.

From a political perspective, the Brexit is now more about triggering Article 50 by the end of next month, which will give the U.K. government the ability to finalize the leaving process within two years - around March 2019. However, Chancellor Philip Hammond’s recent remarks suggest that reaching a sustainable deal for both sides might well take longer than two years. There could be a discussion with the EU to extend the timeframe for leaving the EU at least for some sectors, particularly for financial services to retain access to European market until a deal is agreed and ratified by 27 members of the EU and the U.K.

 

 

 

 

 

 

13 Feb,2017

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