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Bank of England downgrades growth forecast but predicts economy will bounce back

Governor of the Bank of England Mark Carney told ITV News: "The most likely scenario is that interest rates will increase over the course of the next year."

It’s a hold on interest rates, but a “hawkish” one - with a clear hint of rises to come.

No so long ago an increase in the cost of borrowing in May looked nailed on, but it hasn’t happened today because of a run of poor economic news.

Unsurprisingly, the minutes of the Monetary Policy Committee (MPC) make it clear that it was the the publication of the feeble GDP figures two weeks ago that killed any prospect of a change.

Between January and March this year (Q1), economic growth slowed almost to a standstill.

The Office for National Statistics said the bad weather wasn’t to blame.

The Bank of England takes a different view.

The Bank judges that the cold, the wet and the snow did have a material affect on growth, curtailing activity on building sites and high streets in particular.

The Bank of England has voted to keep interest rates on hold. Credit: PA

The Bank decided the first estimate for Q1 was misleadingly poor, the data was “temporary or erratic” and that the growth figure for the period (0.1%) will be revised upwards as more data flows in.

The Bank also judges that the economy will bounce back - its growth forecasts for the second quarter of the year have been downgraded slightly, but thereafter it’s steady as she goes.

The Bank’s assessment of the overall health of the economy is strikingly unchanged from three months ago.

It expects GDP to grow by an average of 1.75% over the next three years and inflation to continue to fall.

The Bank now believes CPI inflation will reach its target of 2% by 2020 as the impact of the devaluation of sterling wanes faster than it had previously expected.

The Bank’s belief that the economy will shake-off it’s sluggish start to 2018 is predicated on an assumption that exports will continue to grow - thanks to strong global growth - and that consumers will start to feel better off.

The economy is still creating plenty of jobs and pay is beginning to rise faster than prices - these things are reasons to be optimistic.

It is thought that rates will rise to 1.25% by 2021. Credit: PA
  • What about the cost of borrowing?

If the Bank’s forecasts are on the money, the market expectation is that Bank Rate will rise from 0.5% today to 1.25% by 2021.

  • What could possibly go wrong?

Quite a lot.

The MPC minutes acknowledge concerns.

The news from the retail sector of the economy is “particularly downbeat” with insolvencies on the rise; the housing market looks “soft” with transactions on the slide; credit card borrowing “tightened” in recent months.

None of these things suggest a revival is underway.

The Bank of England believes the outcome of the Brexit negotiations will have a big impact on the UK's prosperity. Credit: PA
  • If in doubt, wait and see

Not least to see how Brexit negotiations pan out.

The Bank repeats its view that final settlement between the Government and the European Union could have a profound impact on our prosperity.

Three weeks ago, the Bank managed expectation that the cost of borrowing would likely rise “somewhat earlier and by a somewhat greater extent” than everyone was expecting.

Now we’re being told we’ll have to wait to see what happens next, but the direction of travel remains the same.

Mixed, confusing messages? Some will say so.

The Bank of England will argue it’s keeping its eyes firmly fixed on the numbers and all decisions will be driven by the data.