Bank of England keeps rates at record low as economy slows

Bank of England governor Mark Carney.

In the report, the Bank cautioned the expected slowdown in consumer spending "may have started".

While inflation, now at 2.3 per cent, would likely peak at close to three per cent in late 2017, the Bank forecast the pound would pick up after the general election.

The Bank's two previous sets of quarterly forecasts brought big upward revisions to the growth outlook and on Thursday it only softened its short-term outlook a fraction, despite recent data showing that growth is now slowing sharply.

The pound also fell 0.7 percent to 84.87 pence per euro after the single currency saw broad buying following some weak US data.

In more bad economic news, industrial output dropped by 0.5 per cent in March and the construction sector by 0.7 per cent, as the trade deficit grew.

The Bank of England on Thursday held its main interest rate at a record low 0.25 percent and crimped its economic growth forecast as Brexit uncertainties hit consumption.

Faced with Brexit unknowns, a national election and mixed economic data, Bank of England Governor Mark Carney and his colleagues will probably say on Thursday they want more clarity before paving the way for the first interest rate hike in almost a decade. Since then, markets have moved to price an earlier rate hike by the bank and sterling has strengthened, which should help to push down on inflation.

"This is going to be a more challenging time for households", Carney said at a press conference in London on Thursday.

The bank said it expected first quarter growth to be revised up to 0.4 per cent.

The minutes repeated a statement made in May that for those voting to keep interest rates on hold "it would take relatively little further upside news on the prospects for activity or inflation for them to consider that a more immediate reduction in policy support might be warranted".

The rise in inflation entirely reflects the effects of import prices and weaker sterling, Carney said, adding that it "has been offset to some extent by the continued subdued growth in domestic costs with wage growth notably weaker than expected".

But he said wages were falling partly because firms are anxious about trading prospects outside the European Union, causing them to offer "more modest pay settlements". It trimmed its forecast for growth to 1.9 percent from 2.0 percent previously.

The reduction in the growth forecast - from 2 per cent to 1.9 per cent - came after a sharp slowdown in GDP in the first quarter of the year and after figures from the Office for National Statistics showed manufacturing output fell 0.6 per cent in March, while construction dipped 0.7 per cent as industrial output as a whole slumped 0.5 per cent. Samuel Tombs, chief United Kingdom economist at Pantheon Macroeconomics, said, "March's simply terrible trade figures demonstrate that Britain is failing to capitalise on sterling's depreciation".

The report, released alongside the rates decision, also offered some cheer for the growth outlook as forecasts were raised to 1.7% for 2018 and 1.8% in 2019 from February's prediction for 1.6% and 1.7% respectively.

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