The Bank of England scrapped its plan to cut interest rates and said borrowing costs could now move in either direction as the slide in sterling following the Brexit vote prompted it to ramp up its forecasts for growth and inflation in 2017.
The battered pound extended its gains on the day and British government bond prices fell after the BoE shifted to what governor Mark Carney called “a neutral stance” on what its next move on interest rates would be.
The central bank, which has come under heavy political criticism for its near-zero rates, sharply adjusted its view of when Britain's economy will feel the pain of June's referendum decision to leave the EU.
In a set of quarterly forecasts published yesterday, it largely reversed its previous view of a major hit to growth next year, raising its forecast to 1.4 per cent from an estimate of 0.8 per cent made in August.
But it warned that Britain's access to EU markets in the future could be “materially reduced”, which would hurt growth over “a protracted period”, and forecast a slower recovery for 2018 and 2019.
The BoE responded to the Brexit vote by cutting interest rates to a record low of 0.25 per cent in August and restarted its massive bond-buying programme for the first time since 2012. It said then that another rate cut was likely this year if the economy slowed as it expected.
Critics of the bank, many of them supporters of the successful campaign to quit the EU, accused Carney and his fellow policymakers of overstating the potential hit to the economy from the referendum result.
Asked at a news conference about the sharp changes to the bank's view on growth in 2017, Carney said that in “broad-brush” terms the bank was sticking to its view made in August of what the economy will look like in three years' time.
“We end up basically in the same place as the economy after a substantial stimulus package from the Bank of England, and from stimulus from a fairly sharp depreciation in the currency - so broad-brush, that's there,” he said.
Yesterday’s change in stance could please Theresa May
The BoE's policymakers voted 9-0 at their November meeting to keep rates on hold at 0.25 per cent, in line with economists' expectations in a Reuters poll.
There was also unanimous support to stick with August's plans to buy a total £435 billion of government debt and £10 billion of corporate bonds.
The bank's forecasts showed it now expected a record overshoot of inflation above its target over the next two to three years, rising above 2.8 per cent in early 2018, because of sterling's fall to a 31-year low against the US dollar.
“There are limits to the extent to which above-target inflation can be tolerated,” the BoE's Monetary Policy Committee said in a statement as it forecast inflation would jump to 2.7 per cent this time next year, nearly triple its current level.
Inflation was only expected to return to two per cent in 2020.
“Monetary policy can respond, in either direction, to changes in the economic outlook as they unfold to ensure a sustainable return of inflation to the two per cent target,” the MPC said.
Yesterday's change in stance could please Prime Minister Theresa May, who said last month that the BoE's ultra-loose monetary policy had “bad side effects” for savers and had to change, raising questions about the BoE's independence. Soon after, Carney said he would not “take instruction” from politicians on how to meet the Bank's inflation target.
Earlier this week, the Canadian said he would stay at the BoE for an extra year until June 2019 but declined to take up an option of staying until 2021.
At his news conference yesterday, Carney sought to return the focus to the bank's bread-and-butter business of monetary policy, telling reporters that Britain had had enough of the “saga” around his position and downplaying suggestions he came under political pressure from May. But he declined to answer a question about whether he might stay on at the Bank longer than 2019.
Sterling's renewed fall last month came shortly after May suggested she might adopt a tough approach for negotiations with the EU, potentially limiting British exports and pushing the currency to around $1.22. It jumped above $1.24 yesterday after England's High Court ruled that the government needs parliamentary approval to trigger Brexit. Carney cited the ruling as an example of uncertainty that could affect the economy.
Sterling rose further to nearly $1.25 after the BoE announcement.
While the BoE raised its growth forecast for 2017, it revised down its 2018 growth forecast to 1.5 per cent and saw growth of 1.6 per cent in 2019.