Bank of England reverses gloomy economic forecasts published prior to Brexit vote

The Bank of England has left the UK interest rate unchanged at 0.25%, in line with market expectations, following the conclusion of its latest Monetary Policy Committee (MPC) meeting on Thursday (3 November).

The MPC also voted unanimously to maintain its level of government bond purchases at £435bn ($542.7bn) and corporate bond purchases at up to £10bn. However, the rate-setting committee opined that it would not extend the quantitative easing programme further to boost the economy at the present moment in time.

Reversing gloomier pre-Brexit vote forecasts, the Bank of England said it expects the UK economy to grow by 2.2% in 2016, up from 2%. It has also revised its 2017 forecast to 1.4%, up from 0.8%.

However, the UK central bank cut its growth outlook for 2018 to 1.5% from 1.8%, and warned that the country's access to European Union markets could be "materially reduced" which would hurt growth over "a protracted period".

Laith Khalaf, senior analyst at Hargreaves Lansdown, said: "The facts have changed, and so the Bank of England has changed its mind about the prospects for UK economic growth.

"It's no surprise to find economic forecasts wobbling all over the place right now, they are always prone to error and particularly fallible at the moment due to the enormity of the Brexit process, and the big currency movements we have witnessed since the referendum."

On the inflation front, minutes of the MPC meeting, published in tandem with the interest rate announcement, noted: "Largely as a result of the depreciation of sterling, CPI inflation is expected to be higher throughout the three-year forecast period than in the Committee's August projections.

The committee's central projection is for inflation to rise from its current level of 1% to around 2.75% in 2018, before "falling back gradually over 2019 to reach 2.5% in three years' time."

"Inflation is judged likely to return to close to the target over the following year." As a result, the MPC noted that interest rates could both rise or fall with no clear directional pattern in sight.

Paul Diggle, senior economist at Aberdeen Asset Management, said: " With its longer term GDP growth forecast revised down because of the eventual impact that Brexit will have on the economy, a rate cut might be back on the agenda before too long."

Philip Shaw, economist with Investec, said: "The BOE's take on the direction of interest rates is more of a statement to soothe inflation expectations, especially given the steeper yield-curve that has been evident over the past few weeks."