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EXTRA: GDP Forecasts Boosted But UK Interest Rates On Hold Until 2021.

LONDON (Alliance News) - The Bank of England on Thursday upgraded its UK gross domestic product forecasts as it suggested interest rates will not rise until 2021.

The BoE, in its latest quarterly Inflation Report, now sees the UK economy growing 1.5% in 2019, having been revised down to 1.2% in February's inflation report. In 2020, this is expected to pick up slightly to 1.6% before accelerating more substantially to 2.1% in 2021.

In February, the BoE had forecast gross domestic product growth of 1.5% in 2020 and 1.9% in 2021. In the November 2018 inflation report, growth had been forecast at 1.7% in each of 2019, 2020 and 2021.

The central bank thinks GDP growth will come in at 0.5% in the first quarter of 2019, stronger than expected, but should pull back to 0.2% expansion in the following three months.

This strength in the first three months of the year was due to a boost from Brexit stockpiling, the BoE highlighted, which should prove to be temporary and thus economic growth in the months ahead will likely temper.

"Overall, the MPC judges stockbuilding has accounted for some of the recent unexpected strength in GDP growth, and that stockbuilding will drag on growth by a similar amount in the second quarter of 2019," the BoE explained.

The outlook for near-term growth, however, was judged by the bank to be "more uncertain than usual".

And, though the first-quarter growth print is set to be better-than-expected, the BoE thinks underlying momentum is "marginally below potential" at present.

This is due to muted global growth and Brexit uncertainty, which has damped business investment.

Business investment has been "unusually weak" since the 2016 EU referendum, and this has "intensified" over the past year. In the fourth quarter of 2018, business investment fell by 0.9%, the fourth successive quarter of decline.

Falling business investment comes despite many supportive factors, such as a relatively low cost of finance, robust rates of return on capital, and a tight labour market.

"The weakness of business investment despite these supportive factors suggests that Brexit-related uncertainties have had an impact," the BoE said. Further, investment is expected to stay weak in the near-term.

Brexit-related uncertainty is also seen lingering over the coming months, subsiding gradually over the second half of the BoE's forecast period, in line with the bank's view the UK will leave the EU in a smooth manner.

Inflation, meanwhile, is seen below target in 2019. CPI inflation is forecast at 1.6% in 2019, though ticking up to the bank's target of 2.0% in 2020 and further upwards, to 2.1%, in 2021.

The 2019 estimate was well below the 2.0% predicted in February, while inflation had been expected at 2.1% in both 2020 and 2021.

The cut to the 2019 forecast reflects an anticipated fall in retail energy prices, the BoE said. Wholesale gas and electricity prices have both dipped by around a third since the February Inflation Report, which is expected to feed into retail prices.

The UK's central bank sees interest rates as unlikely to rise for another two years, it confirmed Thursday.

The nine-strong Monetary Policy Committee voted to keep Bank Rate at 0.75%, while also unanimously voting to keep corporate bond purchases at up to GBP10 billion and purchased assets at GBP435 billion.

A press conference will be held with BoE Governor Mark Carney at 1230 BST.

The path for Bank Rate as implied by forward market interest rates is now expected to reach 1.0% in 2021, in February having been predicted to reach this a year earlier, in 2020. This implies the BoE is unlikely to hike rates for another two years.

Over the past months, interest rate expectations in the EU and the US have fallen "significantly", the BoE said, with market expectations for UK interest rates slipping in step with this.

On the labour market, the BoE noted conditions remain tight with employment growth stronger than expected, despite Brexit uncertainty. Productivity growth remains weak, however, and is continued to be subdued in the near-term.

At the same time, pay is growing at its most robust sustained rate since 2008.

Whole-economy total pay is expected to have grown 3.5% in the first quarter of 2019, substantially higher than the post-financial crisis average of just 1.9%. The main driver of this has been a tight labour market, which the BoE thinks is likely to persist.

The BoE forecasts the LFS unemployment rate to fall to 3.6% in 2021, after printing 3.8% in both 2019 and 2020. This is a significant improvement on the average rate over 1998 to 2007 of 5.3%.

Ultimately, the MPC judged its current monetary policy stance to be "appropriate".

The BoE reiterated its view the monetary response to Brexit "will not be automatic and could be in either direction". The economic outlook will continue to depend on the timing and manner of the UK's withdrawal from the EU.

"The committee continues to judge that, were the economy to develop broadly in line with its Inflation Report projections, and ongoing tightening of monetary policy over the forecast period, at a gradual pace and to a limited extent, would be appropriate to return inflation sustainably to the 2% target," the MPC said.

By Lucy Heming; lucyheming@alliancenews.com

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Publication:Alliance Newswire
Geographic Code:4EUUK
Date:May 2, 2019
Words:907
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