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Bank of England eyes interest rate hikes as outlook brightens

Bank of England eyes interest rate hikes as outlook brightens

A man talks on a mobile phone as people walk past the Bank of England, in London. (REUTERS/Mary Turner/Files)

LONDON: The Bank of England hinted on Thursday (May 2) at quicker-than-expected interest rate hikes, after raising its UK economic growth forecasts thanks to company stockpiling ahead of Brexit.

The British central bank predicted that gross domestic product (GDP) would expand this year by 1.5 per cent as stockpiling offsets lower business investment. That compared with the previous growth estimate of 1.2 per cent.

Economic activity was given a temporary boost as companies rushed to stockpile before the original Mar 29 Brexit deadline, the BoE said alongside an announcement that it had kept its main interest rate at 0.75 per cent.

The latest forecasts assume a smooth path towards Britain's eventual exit from the European Union, of which it has been a member since 1973.

BoE Governor Mark Carney later told a news conference that rates would have to increase more quickly than markets currently anticipate - if the predictions proved correct.

"If something like this forecast comes to pass, we could see a period where the economy is growing and pressures continue to build despite this uncertainty," Carney said.

"If a Brexit resolution is some form of arrangement with some smooth resolution to it, it will require rate increases, and more frequent rate increases than the market currently expects," he added.

BREXIT UNCERTAINTY

The BoE added Thursday that the UK economy was expected to expand by 1.6 per cent in 2020, up slightly from its earlier guidance of 1.5 per cent.

"Brexit-related uncertainty has led to a reduction in business investment and an increase in stockbuilding," the institution said in its outlook document.

"In comparison, household spending has been relatively resilient, although the housing market has remained subdued."

Britain is now due to leave the EU by Oct 31 after two delays were triggered by MPs rejecting the divorce deal Prime Minister Theresa May had struck with the bloc.

The delays boosted Britain's gross domestic product (GDP) in the first three months of 2019 thanks to stockpiling, but the BoE anticipates a moderate slowdown in the second quarter.

"GDP is expected to have grown by 0.5 per cent in the first quarter, in part a reflection of a larger-than-expected boost from companies in the United Kingdom and the European Union building stocks ahead of recent Brexit deadlines," the bank said.

"That boost is expected to be temporary, however, and quarterly growth is expected to slow to around 0.2 per cent in the second quarter."

The BoE added that the "subdued pace (of GDP expansion) reflects the impact of the slowdown in global growth and ongoing Brexit uncertainties".

Thursday's updates come one day after the US Federal Reserve dented prospects for a possible cut in American interest rates as solid US economic growth helps to offset a slowdown elsewhere.

The European Central Bank is meanwhile expected to keep eurozone borrowing costs at historic lows until at least the end of 2019.

'NO RETREAT FROM HIKES'

"Unlike the ECB and the US Fed, the Bank of England has not retreated from its plan to raise rates," noted Ian Stewart, chief economist at accountancy group Deloitte.

"The bank is in no hurry, but the message to markets is not to underestimate the possibility of future rate rises."

The BoE news also come after it recently fired the starting gun on the search for a replacement for Carney.

The Canadian leaves his role on Jan 31, having extended his tenure twice owing to Brexit turmoil.

Carney, 54, took up the post in July 2013, with the UK economy struggling to recover from the global financial crisis and with the Bank of England's main interest rate at a then record-low 0.50 per cent.

Under his leadership, the BoE had repeatedly warned that Brexit could push Britain into recession, in the run-up to the nation's EU membership referendum that was held in June 2016.

Source: AFP/de

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