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    BoE lowers growth and inflation outlook but downplays talk of rate cut

    The Bank of England downgraded its projections for the UK economy in its latest quarterly inflation report. It also decided to keep interest rates unchanged at a record low of 0.5% as expected. However, in a surprise move, the MPC’s lone dissenter, Ian McCafferty, who had been voting for a quarter point rate hike since last August, voted to keep rates on hold at today’s meeting.

    In its February report, the Bank lowered its growth and inflation forecasts for 2016-2018 as slowing global growth rates and a renewed slide in oil prices weigh on the outlook. The UK economy is expected to grow by 2.2% in 2016 and 2.4% in 2017, compared to forecasts of 2.5% and 2.7% respectively in the November report. Inflation is forecast to average 0.4% in the first quarter of 2016 and increase to 1.2% in Q1 2017. It’s not expected to hit the Bank’s 2% target until the first quarter of 2018 when it’s forecast to rise slightly above it at 2.1%. The Bank had previously forecast to meet the target in the fourth quarter of 2017.

    The Bank’s projections were based on the market implied path of UK interest rates which are currently pricing in a 25bps increase in Q4-2017/Q1-2018. However, most economists expect the Bank to start lifting rates before this. BoE Governor Mark Carney stressed in today’s press conference that the next move is likely to be up than down and that the MPC did not discuss a rate cut in today’s meeting. Speculation has increased in recent weeks that the Bank may be forced to cut rates in the face of global headwinds.

    Another factor delaying a rate hike has been disappointing wage growth. The Bank lowered its projections for wage growth over the next three years, cutting its forecast for 2016 to 3% from 3.75%. There was some good news for UK productivity though with signs of productivity growth having picked up in 2015. Productivity is expected to improve further as the labor market continues to tighten. The Bank did not revise its assumed level of equilibrium unemployment (thought to be around 5%), suggesting there’s little slack left in the labor market given that the unemployment rate currently stands at 5.1%.

    Sterling fell briefly against the dollar, dipping to 1.4529 after the minutes, as traders saw the unanimous vote to keep policy on hold as a dovish tilt. However, the pound quickly rebounded as Mark Carney played down expectations of a rate cut or further stimulus in his press conference. Cable rose back above the 1.46 level while the euro was slightly softer at 0.7653 pounds. Sterling has depreciated by around 3% against a basket of currencies since the start of the year as low inflation and slowing growth has pushed back the timing of a rate hike. The upcoming referendum on the UK’s membership within the EU has also been weighing on the pound.

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