Bank warns of 'moderate' growth as it keeps interest rates at 0.25%

Policymakers on the monetary policy committee (MPC) kept interest rates on hold at 0.25 per cent as they nudged down the Bank's growth forecast for 2017 to 1.9 per cent, down from 2 per cent in February, after a sharp slowdown in the first three months of the year.

"Wage growth remains subdued", the Bank of England said in its quarterly inflation report.

"The weak pound since Britain's vote to leave the European Union has seen inflation surge in recent months with a weaker sterling pushing up the price of imported goods", said Tom Stevenson, investment director for personal investing at Fidelity International.

The most recent data puts wage growth was at 2.2 per cent, which is expected to slow further this year before picking up to 3.75 per cent by the end of 2019, according to the Bank.

While inflation, now at 2.3 per cent, would likely remain above the 2 per cent target "throughout the next three years", the Bank said the pound's gain after the general election would help inflation ease back in 2018 and 2019.

The Society of Motor Manufacturers announced new auto sales had slumped by 19.8 per cent year-on-year in April, while the Bank of England reported last month that mortgage approvals dropped to a six-month low in March, the second drop in a row.

Behind the headline figures, however, the BOE's perception of the balance of growth has altered, partly in light of a consumer slowdown hitting growth earlier and more substantively than previously expected.

He said the Bank was working on expectations of a smooth transitition period but that he expected a drag on productivity in future as the United Kingdom adjusted to new arrangements.

Mr Carney said consumers were beginning to feel the pinch as the pound's plunge since the Brexit vote has pushed up prices.

"Given the ascent of headline CPI (which we expect to peak at 3.1% y/y in June and August), the increasing likelihood of negative real wage growth in the coming months, the likely tightening of unsecured consumer credit over the coming quarters (which has of late supported resilience in household consumption), as well as the lowest savings ratio since records began, we expect that UK GDP growth will continue to decelerate over the course of 2017 as households are forced to tighten their belts".

BOE preview: Investors may also see a hawkish tone emerge from the BOE, given inflation is running above its 2% target, the labor market is tight and there have been some "robust" data, said Morgan Stanley economists, led by Jacob Nell, in a research note this week. The market would be interested in his comments on the ongoing Brexit negotiations and his take on the future of euro clearings in London.

He added it was unlikely the Bank would seek to change its stance on rates just before next month's election.

But, if the Bank's more positive outlook towards the end of the three year forecast period comes to pass, the Monetary Policy Committee could move more rapidly towards interest rate rises than some expect. Since then, markets have moved to price an earlier rate hike by the BoE and sterling has strengthened, which should help to push down on inflation.

Minutes of the rates meeting showed seven MPC members voted to keep rates unchanged, while outgoing policymaker Kristin Forbes remained the sole dissenter, repeating her call for a rise to 0.5 per cent.

However, the Bank of England said it expected a pick-up in foreign trade and investment would offset a shortfall in domestic demand this year.

'In the final year of the forecast, however, the output gap closes and inflation rises slightly further above the target.

A general view shows the Bank of England in the City of London, Britain April 19, 2017.

It said consumers were being squeezed between sluggish income growth and rising inflation, and that could be seen in weak retail sales and a sharp fall in new vehicle registrations in April.

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