Bank of England slashes its growth forecast (again)

Looking ahead the GBP EUR exchange rate is likely to remain on the back foot for the remainder of this week's session as markets digest the BoE's decision to leave interest rates on hold again. Growth in 2018 is also expected to slow from 1.7% to 1.6%.

The bank said it now expects the United Kingdom economy to grow by 1.7pc this year, down from its May forecast of 1.9pc.

"The MPC said given the other assumptions in its forecast it thought probably there would need to be rate rises, and indeed more rate rises than those priced into the interest rate curve in future than the financial markets expect".

The pound advanced to 1.3164 versus the greenback, 1.2739 against the franc and 0.9026 against the euro, from its early lows of 1.3128, 1.2713 and 0.9048, respectively.

THE BANK of England has revised down growth forecasts for the United Kingdom as it held interest rates yet again this month.

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It is unlikely more rate-setters will join dissenters in voting for a hike, although there have been signs of a growing split on the MPC. This should give the Fed some confidence to continue tightening policy through rate hikes and balance sheet reduction over the medium term which they may highlight at the Jackson Hole Economic Symposium at the end of August.

Personnel shuffling at the top also strengthened the hand of dovish rate-setters. The currency had risen to an 11-month high after the MPC's previous meeting, when three policymakers voted to raise rates. Monetary policy cannot prevent the weaker real incomes likely to accompany the move to new trading arrangements with the European Union, but it can influence how this hit to incomes is distributed between job losses and price rises.

"The Committee will continue to monitor closely the incoming evidence, and stands ready to respond to changes in the economic outlook as they unfold to ensure a sustainable return of inflation to the 2% target", it said.

David Hollingworth from L&C Mortgages said the scheme has helped boost competition in the mortgage market and "underlines that rates won't necessarily remain at the current lows forever".

"Since the referendum was called, United Kingdom households, businesses and financial markets have reacted at different speeds and to varying degrees to the prospects for the UK's departure from the EU".

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But the Bank appeared to suggest that households and businesses should not expect borrowing costs to stay at their record low for much longer.

Jeremy Duncombe, director of the Legal & General Mortgage Club, said in the year since rates were taken to an historic low, the mortgage market has remained buoyant, quickly adapting to the challenges of Brexit and the United Kingdom general election result.

Fabrice Montagne, chief United Kingdom and senior European economist at Barclays, said: "We expect the Bank of England to downgrade its forecast in order to reflect disappointing data".

Inflation is expected to peak at around 3% by October, before gradually moderating, and falling to 2.2% by 2020.

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