"While growth is running a bit cooler than expected, inflation is a bit hotter in the near term and safely above the Bank’s 2% target."
UK GDP growth fell back in the first half of 2017 and is expected to remain at 0.3% in Q3 before picking up slightly at the end of the year. Over 2017 as a whole, growth is projected to be a little weaker than anticipated in May, reflecting a less marked pickup in business investment.
The Bank has therefore downgraded its forecast for GDP growth since the May meeting. The Bank now predicts GDP to rise by 1.7% in 2017, 1.6% in 2018 and 1.8% in 2019, down from 1.9%, 1.7% and 1.8% as outlined in the May Report.
Financial market prices now imply a rise in Bank Rate in 2018 Q3, compared with 2019 Q4 at the time of the May Report.
The projections in the Report are conditioned on a path for Bank Rate nearly a quarter of a percentage point higher than that in the May Report.
Tom Stevenson, investment director for Personal Investing at Fidelity International, commented: “It seems the bank is reluctant to rock the economic recovery by hiking rates just yet and the Bank’s view on growth has also been downgraded since the May meeting.
"What’s driving that sluggish growth is the other key figure in today’s smorgasbord of data - inflation. While growth is running a bit cooler than expected, inflation is a bit hotter in the near term and safely above the Bank’s 2% target. Again, the Bank has tweaked its expectations on inflation. Three months ago, it was looking for prices to rise by 2.6% this year, by 2.6% in 2018 and 2.2% in 2019. Today’s forecasts are respectively 2.7%, 2.6% and 2.2%."
Laith Khalaf, Senior Analyst at Hargreaves Lansdown, added: "The Office for Budget Responsibility thinks interest rates will rise to just 1% by 2022, still below the rate of inflation, assuming the Bank of England meets its 2% CPI target.
"The Bank of England has also downgraded its growth forecasts for 2017, on the back of a pretty disappointing first half of the year. Some will point to this as evidence that Brexit is taking its toll on the UK economy. However while the last two quarters have certainly seen a dip in growth, overall economic performance has been better than expected since the EU referendum, particularly in light of some of the dire forecasts that preceded the vote.
"The Brexit process is really only just beginning, and it will have many long-lasting implications. Consequently the task of determining just what effect Brexit had on the UK economy will mostly fall on the shoulders of tomorrow’s historians, rather than today’s economists."
