The Bank of England has warned households to expect interest rates to rise over the next year but also predicted living standards will be squeezed by higher inflation and sluggish wage growth.
The Bank’s rate-setting committee voted by 6-2 to leave official borrowing costs at their all-time low of 0.25%, according to minutes from their meeting released on Thursday.
New economic forecasts released by the Bank at the same time cut the outlook for GDP growth this year and next and painted a weaker picture for earnings growth. But the Bank appeared to send a clear message that businesses and households should not expect borrowing costs to stay at their record low for much longer.
The meeting minutes noted that if the economic picture evolved as the Bank was predicting, interest rates could be raised by more than financial markets are currently pricing in. Those market expectations are for two rises to 0.5% and then to 0.75% over the next three years.
The minutes said: “If the economy were to follow a path broadly consistent with the August central projection, then monetary policy could need to be tightened by a somewhat greater extent over the forecast period than the path implied by the yield curve underlying the August projections.
“All members agreed that any increases in Bank rate would be expected to be at a gradual pace and to a limited extent.”
In the Bank’s economic forecasts released on Thursday, key points included:
• GDP growth now expected to be 1.7% in 2017, down from 1.9% predicted in May
• GDP growth in 2018 expected to be 1.6%, down from 1.7% predicted in May. 2019 growth was left at 1.8%
• Inflation in the third quarter of this year expected to average 2.7%, up from 2.6% predicted in May
• Average earnings growth predicted to be 2% in 2017, unchanged from May’s forecast. But 2018 earnings growth cut to 3% from 3.5% and 2019’s to 3.25% from 3.75%
The decision to leave rates unchanged was as the vast majority of City economists had expected. But some analysts had seen a small chance of a rate rise this week after comments from the Bank’s governor, Mark Carney, and other committee members that they were more open to higher rates to keep inflation in check.
Price pressures have risen since the vote to leave the EU last year knocked the pound sharply lower, thereby increasing the cost of imports to the UK. The Bank warned on Thursday that this currency effect on inflation would continue to play out over coming years.
Two members of the monetary policy committee (MPC), Ian McCafferty and Michael Saunders, wanted to put rates back to 0.5% immediately to curb inflation.
The government sets the Bank an inflation target of 2% but the rate is currently above that at 2.6%, with policymakers expecting it to pick up and peak around 3% in the autumn on the consumer prices index (CPI) measure.
But the other six members of the committee felt it was better to wait before reversing the emergency cut it made to borrowing costs in the aftermath of the Brexit vote a year ago.
Outlining the two sides of the debate over a rate rise, the minutes said: “There were arguments in favour of a moderate tightening in monetary policy now. CPI inflation was substantially above the target, and was projected to remain above the target throughout the three-year forecast period.”
On those wanting to hold rates, the minutes added: “There were also arguments in favour of leaving the policy rate unchanged. GDP growth had been sluggish and was expected to remain so in the near term. With some business survey expectations balances having weakened, there remained the possibility of a further softening in activity.”