Published on 3 Nov 2016

Bank of England warns of tougher times to come

It was the best of times it was the worst of times: No rate cut needed and better growth thanks to unrelenting consumer spending. But prices set to rise as sterling slides and companies suspend investment in the face of a hard Brexit. And most tellingly the prospect of an interest rate hike now looming on the horizon.
The Bank of England may have delivered better short term growth prospects but the broad picture was of an economy facing more challenges and consumers exposed to a sharper pinch in their back pockets.
The main reason is that real incomes are now set to be squeezed further with the impact of Brexit fuelling supermarket price rises and a cut in corporate investment.
The bank laid bare a stark view of how quickly inflation will rise, jumping to as much as 2.83pc in June 2018 from 1pc where it sits now. For people doing their weekly shop this will put a huge strain on their finances given wages are set to grow less than anticipated in August.
In fact, the bank’s inflation estimate is the biggest overshoot of its 2pc target since the inauguration of its remit in 1997 when it became independent.
But the truth is that the bank’s view is fairly conservative compared to other economists, with think tank NIESR predicting inflation will spike as much as 4pc. If inflation goes this high it is hard to see how much the bank can avoid being bounced into a rate hike.
In the Inflation Report the BoE says that while the continuing slide of sterling has made the situation more extreme, ‘attempting to offset it fully with tighter monetary policy would be excessive and costly in terms of forgone output and employment growth’. Said plainly, the bank has decided to ignore its inflation remit for now by not hiking rates because it thinks this would further damage growth and increase unemployment.
The big caveat is that while the bank explains a list of vague conditions for ‘looking through’ high inflation, it does state unequivocally that there are ‘limits to the extent to which above target inflation can be tolerated’. Something reiterated by recent comments made by the Governor Mark Carney.

Bank of England governor Mark Carney arrives at Number 10 Downing Street in central London, Britain October 31, 2016. REUTERS/Stefan Wermuth - RTX2R6YF
Overall growth is now forecast to be 2.8pc weaker over the next three years compared with estimates before the Brexit vote. In fact, despite growth being revised up in Q3 this year from 0pc to 0.5pc and from 0.1pc in Q4 to 0.4pc – over the three year forecast period – GDP is now set to be lower than even expected in August at the nadir of the market shock to Brexit.
It’s been a tough few weeks for the Governor Mark Carney as Tory elders reproached him for being too political and the Prime Minister criticised the bank for dolling out quantitive easing in a world where inequality is exaggerated by booming asset prices.
Perhaps that’s why in the inflation report the bank is so quick to claim credit for the stabilisation of the pound in the aftermath of the referendum by introducing more QE and cutting rates. A measure while unpopular with backbench Tories has been credited by many economists for increasing market confidence.
For Crispin Odey, the star hedge fund manager, the actions of the bank have only led to asset bubbles in the stock market and a delay in an inevitable recession – one he claims would be healthy for the UK economy.
‘We are running out of reasons for not having a recession,’ Mr Odey told Channel 4 News. ‘Recession is seen as too dangerous but maybe it’s not such a bad thing’ said Mr Odey pointing to the productivity damage done to the UK economy.
But while there is some merit in the creative destruction theory that reinvigorates the economy by weeding out weaker companies and more expensive-less productive staff – ultimately recessions tend to hurt the poorest in society most.

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