Bank of England cuts inflation and growth projections, unlikely to hike rates soon

The Bank of England, in its latest Inflation Report, has again revised its inflation and growth forecast downwards. Also, the revised forecasts are again conditioned on a record low market rate profile. The interest rate is predicted to rise by just 0.5% from the current level of 0.5% by the start of 2019. The BoE's Monetary Policy Committee (MPC) now forecasts inflation to reach 2.25% in Q1 2019, as compared with its earlier forecast of 2.22% in Q1 2018. The central bank did not make any changes to its global GDP growth forecast. However, the bank admits that there has been a decline in the global financial conditions.

Meanwhile, the central bank has also lowered its unemployment forecast considerably. However, it has also cut its earnings projection and forecast for unit labor costs. Hence, the central bank acknowledges that inflation pressures are muted. According to the BoE, one of the many likely contributory factors is that workers are bargaining a real wage and not nominal wage. Therefore, nominal wage demands might be taking this into account.

With a benign inflation outlook, an increasingly dovish MPC and considerable downside risks from the external environment, it becomes highly challenging to expect the BoE to hike rates.

"We no longer predict any rate hikes in this growth cycle. Therefore we change our forecast from the existing path of 25bp rate increases starting in Q4 2016 and peaking at 2.5% in 2018 to one with no rate increases at all. That also implies no start of asset sales", says Societe Generale.