UK rate rises depend on smooth Brexit deal, says BoE

UK interest rates are likely to be able to rise towards more normal levels over the next three years, the Bank of England said on Thursday, but it delivered a sting in the tail by basing its optimistic forecasts on the assumption that Theresa May secures a “smooth” Brexit.

In a stark warning to the prime minister less than one month before the general election, the central bank made it clear that its sanguine forecasts depended on her achieving success in negotiations in Brussels to ensure companies will not have to make sharp adjustments to their business plans.

Mark Carney, BoE governor, said a smooth Brexit required, “an agreement about future trading arrangements and a transition, or an implementation period, from the negotiation to that new agreement”.

Despite bad blood between the UK and EU27 before the negotiations start in earnest, the BoE has assumed the prime minister will succeed. On this basis, it thinks the growth slowdown will be temporary and inflation will fall back towards the 2 per cent target after peaking at the end of this year.

The BoE has only marked down its 2017 growth forecast 0.1 percentage point to 1.9 per cent, reflecting weaker consumption in the first quarter that it assumes will continue until the summer.

But its central forecast becomes more optimistic in the second half of this year and thereafter with the BoE forecasting growth of 1.7 per cent in 2018 and 1.8 per cent in 2019, both 0.1 percentage points higher than in the February forecasts.

If the economy performs as expected and Brexit talks go well, the BoE indicated that it would be able to raise interest rates from their current low of 0.25 per cent.

Such a move is not imminent, however. At its May meeting, the MPC voted 7-1 in favour of keeping interest rates unchanged and maintaining the level of money pumped into the economy under the quantitative easing scheme at £435bn.

Kristin Forbes was the only committee member who voted for an immediate interest rate rise.

Source: Financial Times

Jr Trader Petar Milanov

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