UK Economy Has Dropped Since Brexit

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Six of the eight members of the Monetary Policy Committee voted to leave interest rates on hold at their August meeting, with Andy Haldane disappointing many investors after he sided with the doves. "Even when last year's quarter point cut to 0.25% is reversed, I would caution against assuming that the Bank is setting off on a more determined tightening path".

The BOE's latest forecasts for the economy are based on a smooth Brexit, though Carney said on Thursday that the assumption will be tested.

If the BoE wants to prepare markets for policy normalization, this needs to be reflected in the inflation report, which is released along with the rate decision. Real wage growth continued to decline, consumer confidence dropped, and most PMI's indicated slower activity.

But it said the economy would first hit a "trough" this year, with growth of 1.7% before rising to 1.9% next year.

Sterling - supported recently on hopes of an interest rate rise - fell back against the dollar in the wake of the Bank's remarks, by nearly a cent, to $1.3160.

She said: "Uncertainties around the Brexit transition and future UK/EU trading relationships make future interest rates movements less easy to anticipate at present, but this should not discourage businesses and households from preparing for a future with higher rates".

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"Any firm that's set up in the last ten years has only known business life in a low interest rate environment. The chances of a 2017 rate hike now look dead and buried".

The Bank slashed its economic growth forecasts for 2017 to 1.7% from 1.9% and lowered next year's estimate to 1.6% from 1.7%.

Britain avoided a recession after the Brexit vote in June 2016, inflation is running above the BoE's 2 per cent target and unemployment is at a four-decade low.

In all, the Bank of England is expected to keep the interest rates and its QE program unchanged for long, stated Nordea Bank.

The slower inflation coupled with the bank's low growth expectations caused most analysts to agree that it was highly unlikely for the BoE to take a more hawkish tone on monetary policy in the foreseeable future. "The committee would continue to monitor closely the incoming evidence, and stood ready to respond to changes in the economic outlook as they unfolded to ensure a sustainable return of inflation to the 2% target". Standing out was the considerable reduction in wage growth forecasts to 3.0% annually for 2018 from 3.5% just two months ago. It also cut its forecast for growth in 2018, to 1.6% from 1.7%.

At its simplest level, the policy dilemma facing Britain's central bank is that it must balance surging inflation brought on by the weakened pound since the referendum with the slowdown in the economy, dwindling consumer spending, and declining inward investment.