The Bank of England has raised its near-term growth and inflation forecasts on Thursday following the slide in sterling seen since the U.K.’s decision to leave the European Union.
In it’s quarterly inflation report, the U.K. central bank pointed to the pronounced tumble in sterling since the EU referendum as the primary reason behind the hike in its 2017 inflation forecast to 2.7 percent from its August estimate of 2.0 percent.
The BOE sees inflation peaking at this level before edging back down to 2.5 percent by the end of 2019 and then being “likely to return to close to” the bank’s 2.0 percent target during 2020.
In bumping up its gross domestic product (GDP) forecasts for this year and next, the bank highlighted the unexpected resilience of household spending and the housing market as well as the bounceback recorded in indicators of activity and business sentiment since the dark days immediately following June’s Brexit vote.
While 2016 GDP is seen at 2.2 percent, only 0.2 percent higher than forecast in August, the bank’s GDP estimate for 2017 has been catapulted skywards from its August estimate of 0.8 percent to Thursday’s revised figure of 1.4 percent.
Yet, while the BOE acknowledges that the economy’s buoyancy in the wake of the EU referendum has exceeded its expectations, it also revised down its growth outlook further ahead, in a sign that it has deferred rather than an eliminated its concerns over how Brexit will play out.
According to BOE, “Output growth is expected to be stronger in the near-term but weaker than previously anticipated in the latter part of the forecast period.”
This expectation is reflected in the bank’s downward revision to its 2018 GDP forecast to 1.5 percent from August’s 1.8 percent estimate and only a slight uptick over the following year to 1.6 percent.
The BOE focused on the knock-on effects of sterling depreciation as well as the U.K.’s exit process from the EU as the key drivers of its slimmed-down forecast in these years.
While the revision partly reflects the impact of lower real income growth on household spending, according to the report, “it also reflects uncertainty over future trading arrangements, and the risk that UK-based firms’ access to EU markets could be materially reduced, which could restrain business activity and supply growth over a protracted period.”
In terms of factors weighing on growth in the near-term, the bank also highlighted the continued softening of investment intentions and a “subdued” commercial property sector.
The report also addressed changes in the tension faced by the BOE in balancing measures aimed at returning inflation to its 2 percent target with supporting real economic activity, since it last assessed the situation in August.
According to the minutes, “Developments since August, in particular the direct impact of the further depreciation of sterling on CPI inflation, have adversely affected that trade-off. This impact will ultimately prove temporary and attempting to offset it fully with tighter monetary policy would be excessively costly in terms of foregone output and employment growth.”
Yet the BOE indicated it was keeping a close eye on the dynamic saying there are, “limits to the extent to which above-target inflation can be tolerated.”