Sterling has fallen after the Bank of England downgraded its growth forecasts for the UK economy while indicating it could start to raise interest rates in mid-2016.
In its latest quarterly Inflation Report, the central bank cut its projection for UK GDP growth for 2015 to 2.5%, from 2.9% in February.
Governor Mark Carney (pictured) said although UK growth had been boosted by the European Central Bank’s quantitative easing programme and strong consumer confidence, there are still significant headwinds such as slower productivity and supply growth, and the current account deficit.
Carney said although the adjustments reflect a “moderately weaker outlook” there are signs economic growth is “set to re-accelerate” after a softer first quarter.
“European activity should be supported by the ECB’s QE programme which the Monetary Policy Committee judges to be a net positive for the UK. The Greek crisis would only have a modest downward impact on the UK,” the report said.
The Bank also lowered projections for 2016 and 2017 to 2.6% and 2.4% respectively.
Carney also said he expects the global economy to “expand at a steady but not spectacular rate”.
Turning to inflation, Carney said he expects to move below zero, its current level, in the near term, but is on track to return to its target 2% in two years, and even rise above the target by the end of the forecast period. Carney emphasised that lower inflation meant that there would be a “more gradual rate of increase” in interest rates and they will “remain lower than historical levels for some time to come”.
The MPC has kept interest rates unchanged for more than six years, but the Bank said it will look to raise rates from their record low of 0.5% in mid-2016, earlier than the some market commentators have forecast.
“The rate will rise, but it will not move back to historical levels,” said the Governor. “I cannot tell you where it will be in three years’ time, but I can tell you economic growth will return to above trend growth rates, so we do have a stimulative stance.”
When asked about the main challenges facing the UK, Carney highlighted fiscal policy and how it is addressed by the new Conservative government, productivity, and the financial system.
“We need to ensure we have a resilient financial system that conducts business with integrity in an open and innovative way. We have made progress, but the work is not completed. We need to have some adjustments to the measures already put in place,” he said.
