Bank of England lowers outlook, maintains rates

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LONDON: The Bank of England on Thursday (Friday in Manila) cut its forecast for British economic growth and hinted interest rates would remain at a record-low for at least another year amid ultra-low inflation.

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The central bank, revealing its latest quarterly forecasts after holding its key interest rate at 0.50 percent where it has stood since March 2009, warned about the risks from a slowdown in emerging markets.

Gross domestic product was predicted to grow 2.7 percent this year, down from a previous estimate of 2.8 percent given in August, the BoE said in a statement.

The central bank also downgraded next year’s GDP growth forecast to 2.5 percent from 2.7 percent.

Policymakers decided to freeze borrowing costs once again, against a backdrop of negative inflation in Britain.

“The outlook for global growth has weakened” since the bank gave its previous forecasts, the BoE said.

“Many emerging market economies have slowed markedly and the committee has downgraded its assessment of their medium-term growth prospects.

“While growth in advanced economies has continued and broadened, the committee nonetheless expects the overall pace of UK-weighted global growth to be more modest than had been expected in August.

“There remain downside risks to this outlook, including that of a more abrupt slowdown in emerging economies.”

The BoE also noted markets have pushed their expectations for a hike to the first half of 2017, compared with mid 2016 back in August.

That followed a summer global markets meltdown earlier this year that was sparked by investor concerns over a sharp slowdown in the Chinese economy.

The pound sank against the dollar and euro in reaction to comments that implied a rate hike was off the agenda for 2016, dealers said.

The bank’s main task is to keep 12-month inflation close to a government-set target of 2.0 percent.

“We are in a situation where we have resilient domestic demand and, even in the face of global weakness, we still see the need for gradual interest rate rises to bring inflation back to target,” said BoE governor Mark Carney.

If British interest rates do not rise until 2017, that would be good news for borrowers, leaving them with more disposable income.

However, it would heap further misery on savers, whose investments already receive a very low rate of return.

In contrast to the BoE, Federal Reserve chief Janet Yellen on Wednesday left on the table the possibility of an increase to US interest rates in December.

Turning to China, the BoE warned Thursday that a sharp slowdown in the Asian powerhouse would affect the British economy “through a number of channels, including through trade and financial” links.

The institution’s rate-setting Monetary Policy Committee voted by a majority of 8-1 in favour of leaving rates on hold.

The MPC maintained also the bank’s level of cash stimulus pumping around the economy at £375 billion ($577 billion, 529 billion euros).

The British central bank has not delivered an interest rate increase since mid-2007. |

AFP

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