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Bank of England could downgrade UK growth forecast

Published 06/05/2016

The Bank of England could downgrade its growth forecast
The Bank of England could downgrade its growth forecast

The Bank of England could be forced to downgrade its forecast for UK growth on Thursday, if it thinks the economy is slowing down ahead of June's Brexit vote.

The Bank's Monetary Policy Committee (MPC) is expected to vote 9 to 0 to keep interest rates at 0.5%, where they have been since March 2009, despite signs that the economy is beginning to falter.

Last month the Office for National Statistics (ONS) said gross domestic product (GDP) grew by 0.4% in the first three months of 2016, down from 0.6% in the fourth quarter of last year, following an industrial sector slump.

The downward impact on UK growth was driven in part by a poor performance from the manufacturing industry, which fell by 0.4% in the first three months of the year compared with a 0.1% rise in the quarter before. Overall production was down 0.4% between January and March.

The construction industry also dropped back in the first quarter, falling 0.9% compared with an increase of 0.3% in the fourth quarter.

Chancellor George Osborne said that the impending EU referendum vote on June 23 was a drag on the economy.

Mr Osborne warned "the threat of leaving the EU is weighing on our economy. Investments and building are being delayed."

The market will study the MPC's Inflation Report to see if the committee are concerned that the slowdown in the economy is tied to the global easing of markets that will persist in the second half of the year.

The MPC in February previously forecast UK gross domestic product growth of 2.2% this year and 2.4% in 2017.

But economists at JPMorgan say the MPC may downgrade its GDP forecast this year to 2%, due to softening growth.

IHS Global Insight chief UK & European economist Howard Archer said: "The minutes of the May MPC meeting will be scanned to see just how concerned the MPC are over the current slowdown in UK economy and whether they are starting to become increasingly worried that the economy may struggle to regain momentum in the second half of the year even if uncertainty is diluted by a vote to stay in the EU."

The market will also look at the Inflation Report's key consumer price inflation (CPI) forecasts.

If these still show CPI hitting its 2% target rate at the end of 2017, and remaining above that target in 2018, it would indicate that the MPC will be ready to raise rates, starting at some time in 2017.

But, if the Inflation Report shows CPI under its 2% target in 2018, it suggests rates are unlikely to rise in the next couple of years and could even be cut.

IHS Global Insight does not see the MPC raising interest rates from 0.5% to 0.75% until May 2017, and not hitting 2% until the end of 2018.

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