Bank of England lowers growth forecasts in Inflation Report

The Bank of England lowered its forecast for economic growth in 2015, reflecting a more downbeat view on labour productivity, but on the basis of the implied path for interest rates still saw inflation returning to its target in two years’ time.

The Monetary Policy Committee's working assumption embedded in the IR was that Bank Rate rises gradually to 1.4% by the second quarter of 2018.

However, the outlook for growth continued to be solid despite the weakness seen in the first quarter of 2015, the report's overview stated.

Even so, GDP was seen expanding by 2.5% in 2015, less than the 2.9% which the Bank estimated in February. However, that weakness in demand would be offset by a lower degree of supply.

The monetary authority also cut its estimate for the rate of wage growth this year. It now expected it would be at 2.5% in the fourth quarter of 2015 instead of 3.5%.

As well, in his press briefing following the release of the Inflation Report Governor Carney indicated that uncertainty relating to a referendum on Britain's continued membership of the European Union could be a factor to take into consideration going forward.

On a more upbeat note, Carney explained that any intensification of the Greek crisis would only have a moderate impact on UK growth.

“Activity in the United States and a number of emerging markets has slowed but momentum in the euro area appears to have strengthened over the quarter as a whole.”

The central banker also indicated there was a persistent fiscal drag which was likely to continue to be the case over coming years.

Significantly, he emphasised how there was underlying weakness in the rate of growth of labour productivity.

Inflation as measured by the consumer price index was expected to pick up sharply at the turn of the year as the drop in energy prices washes out of the data but to then stabilise at its target level.

Bank Rate was likely to move at gradual pace and to a limited extent, he reiterated.

Commenting on the recent volatility in sovereign bond markets, Carney said it was not surprising.

In a research report e-mailed to clients, Vicky Redwood, chief UK economist at Capital Economics, said the MPC was being overly pessimistic on the outlook for productivity growth, so GDP could be stronger than the new forecasts were indicating, without inflation or interest rates rising any faster than the Committee anticipated.

Redwood also believed the IR vindicated then current market pricing for Bank Rate to begin rising in the middle of next year and reach just 1.25% by the end of 2017.