Bank of England Bets on Smooth Brexit

"It is possible that some of the recent weakness is a effect of companies' uncertainty about the outlook, with some unwilling to raise wages at a faster pace until they have more clarity about their future costs and markets", the Bank said.

Bank governor Mark Carney will also likely be quizzed over the outlook for consumer spending as retail sales have plunged amid the squeeze on household income from Brexit-fuelled inflation.

It also downgraded United Kingdom growth forecasts to 1.9 per cent from 2 per cent previously, but upgraded next year's forecast from 1.6 per cent to 1.7 per cent. However, the Bank also warned that rates may have to rise sooner and faster than the market now expects.

The Bank's forecasts are based on a "smooth" adjustment to a new trading relationship with the European Union after Brexit, the MPC said.

"The weak pound since Britain's vote to leave the European Union has seen inflation surge in recent months with a weaker sterling pushing up the price of imported goods", said Tom Stevenson, investment director for personal investing at Fidelity International. Importantly, they also note that monetary policy "could need to be tightened by a somewhat greater extent" than the path implied by markets.

Once again, this was not the opinion of externally appointed MPC member Kristin Forbes, who as she did in March dissented by voting for a hike of the bank rate to 0.5% due to her concerns about inflation.

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In the report, the Monetary Policy Committee said: "The MPC expects inflation to rise further above the target in the coming months, peaking a little below 3% in the fourth quarter".

In line with market expectations, the BoE voted by a majority of 7-1 to keep the Bank Rate unchanged at 0.25 percent and maintain the asset purchase programme at GBP435 billion.

But the Bank's policymakers said weaker consumer spending would be offset by rising business investment and an improving trade performance as the weak pound and solid overseas demand boost exports.

Ishaan Malhi, CEO and founder of online mortgage broker Trussle, says: "The Bank of England's continued reluctance to raise rates certainly won't be pleasing savers, but anyone looking to buy their first home or switch mortgage can breathe a sigh of relief".

Deputy governor Ben Broadbent insisted the pain for households, amid lower wage growth and higher inflation sparked by the collapse of the pound, would let up over the next three years. Economists surveyed by Bloomberg forecast the regulator will lift its 2017 inflation forecasts and lower growth projections.

The bank's report, released alongside the interest rates decision, offered better news for the growth outlook as forecasts were raised to 1.7 per cent for 2018 and 1.8 per cent in 2019 from February's prediction for 1.6 per cent and 1.7 per cent respectively. ING economist James Smith commented that, despite some hawkish sentiments from Mr Carney, he still did not expect an interest rate hike before Brexit talks conclude in 2019. While growth slowed to 0.3 percent in the first quarter, the weakest in a year, the bank expects the figure to be revised up to 0.4 percent.

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