Bank of England  

BoE holds rates steady but upgrades growth forecast

BoE holds rates steady but upgrades growth forecast

The Bank of England has upgraded its growth forecast for the UK economy in 2021.

The central bank today (May 6) said it expected the UK economy to grow by 7.25 per cent this year, a rise from the 5 per cent predicted three months ago.

The bank’s optimism is attributed to anticipated spending by households who have built up their savings over the past year during the pandemic. 

This prediction makes it very unlikely that the BoE will introduce negative interest rates in the near future, and the Bank's monetary policy committee voted unanimously to maintain rates at 0.1 per cent.

The BoE also said this expected rise in spending meant inflation might reach 2.5 per cent towards the end of 2021, but that there wouldn’t be any long-term impact and inflation would drop back to 2 per cent in the medium term.

However, noting caution, the BoE said: “The outlook for the economy, and particularly the relative movement in demand and supply, remains uncertain. It continues to depend on the evolution of the pandemic, measures taken to protect public health, and how households, businesses and financial markets respond to these developments.”

Eight members of the MPC voted for the BoE to continue its quantitative easing strategy target of £895bn, however according to the FTAdviser’s sister publication The Financial Times, chief economist Andy Haldane preferred to limit the size to £845bn.

Luke Bartholomew, senior economist at Aberdeen Standard Investments, said the bank had upgraded its growth forecasts mostly because the lockdown in the first quarter of 2021 seemed to have turned out better economically than initially feared. 

“The bank now sees activity regaining its pre-Covid levels by the end of this year, but of course in normal times the economy would have enjoyed nearly two years of extra growth between early 2020 when Covid hit, and December 2021. 

“So there will still be a big gap between where the economy is and where it should be at that point. It is this gap that will keep monetary policy very accommodative over the next few years even as the economy posts some extremely strong growth numbers, and inflation picks-up somewhat in the short run.”

The unemployment rate fell slightly to 4.9 per cent in the three months to February, but overall there is judged to be “spare capacity” in the economy at present, and the government’s employment support schemes are expected to significantly limit the near-term rise in unemployment.

The bank predicted this spare capacity will be eliminated towards the end of the year as activity picks up, however it will re-balance in 2022.