Fri, Jun 24, 2022 @ 22:31 GMT
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BOE Upgrades Growth Outlook; Yet, Unemployment Slack More than Previously Expected

BOE voted unanimously (9-0) to leave the Bank rate unchanged at 0.25% and the asset purchases program at 435B pound for UK gilts and 10B pound for non-financial GBP investment-grade corporate bonds. The members revised the growth forecasts significantly higher but left the inflation outlook largely unchanged. The latter was mainly due to the judgment that the labor slack was more than previously expected. Despite stronger growth outlook, Governor Mark Carney warned of the uncertainty over Brexit, cautioning that "there will be twists and turns along the way". While he reiterated that "we can see scenarios in either direction" for policy, we expect BOE to leave the monetary policy and the QE program unchanged at least in the first half of the year.

The Committee has revised the GDP growth forecasts significantly higher. The members now expect the economy to expand +2% in 2017, up from +1.6% previously, and +1.6% in 2018, up from +1.5% previously. Optimism comes mainly from better consumer spending expectations, as well as fiscal support, improved global growth outlook and financial conditions. The inflation outlook was largely unchanged. Headline CPI might reach +2.7% in 2017 and +2.6% in 2018, down -0.1 percentage point each from previous estimates, before slipping to +2.4% in 2019. The members suggested that the slack in the employment market might be more than previously anticipated. As noted in the statement, despite recent rise, pay growth has "remained persistently subdued by historical standards – strikingly so in light of the decline in the rate of unemployment to below 5%". They judged that "this is likely to have reflected somewhat stronger labour supply than previously assumed and, therefore, the presence of a greater margin of slack in the labour market, restraining wage increases". Other factors affecting the inflation outlook include the "3% appreciation of sterling and a somewhat higher yield curve over the past three months".

Despite the upbeat GDP growth outlook, Governor Carney remains cautious over Brexit. As he noted at the press conference, "the Brexit journey is really just beginning; while the direction of travel is clear, there will be twists and turns along the way". Moreover, "the stronger projection doesn’t mean the referendum is without consequence". He reiterated that the monetary policy can more in either direction. As Carney indicated, "if we do see a situation where there is faster growth and wages than we anticipated or spending doesn’t decelerate later in the year, one can anticipate there would be an adjustment of interest rates". We expect the BOE to leave the policy rate and the QE program unchanged at least in the first half of the year.

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