The Bank of England has announced significantly high growth projections for this year.
Bank of England Makes Dramatic Rise in UK Growth Forecast
According to the Bank of England, the UK economy is projected to grow at a rate of 2% this year, up from the November 2016 projection of 1.4% and August’s forecast of 0.8%.
At the same time, it predicted that the savings rate would decline to 4%, the lowest rate seen since the early 1960s.
The Bank held its interest rates at the expected 0.25%.
After the Brexit vote in June, the Bank was highly criticized for being pessimistic when it reduced its growth forecast.
In its Quarterly Inflation Report, the Bank said, “Domestic demand continues to be stronger than it was anticipated in the last few months. There are few signs of the slowdown in terms of consumer spending that had earlier been expected in the wake of the referendum.”
The Bank further added that the latest forecast could be attributed to the improved spending and investment policies proposed by Chancellor Philip Hammond in his Autumn Statement.
The Bank also said that its recent optimistic outlook for the UK economy could also be credited to the strong growth in Europe and in the US, availability of credit and the rising stock markets.
Even then, the Bank indicted a possibility of the economy slowing in2018 when growth is expected to be at a 1.6% annual rate.
The slow growth expected next year could be attributed to a slowdown in household spending in the context of higher inflation. According to the Bank, income growth could hit a plateau this year, when adjusted to inflation.
The expected slowdown in consumer spending is partly due to higher inflation on consumer goods, which the Bank expected would run at 2% in 2017.
Impact of the pound
The weak pound has largely contributed to the inflation, which has seen the cost of imports increase drastically.
Currently, the pound is 16% below the pre referendum level. Recently, it has fallen below $1.21 against the US dollar
The Bank anticipates that the weak pound will boost inflation up to 2.7% next year, much higher than the 2% target inflation rate.
After the Bank’s inflation report was released, the sterling declined sharply while the pound fell by about a cent against the US dollar to close below $1.26.The markets saw the Bank’s report as an indication that the Bank was not looking to raise interest rates soon.
Slow wage rise
The weak rise in wage growth has also come as a surprise to the bank.
In its report, the Bank said, “Wage growth, although edging up, continues to be subdued by historical standards in light of the decline in the unemployment rate to below 5%."
The Bank further said it would be watching spending growth closely in case the rate slows more drastically than expected. If this happens, there is a possibly for a loosening of the monetary policy.