Top Stories
Top Stories
Wires

Bank of England cuts growth forecasts as Brexit and global worries mount

David Milliken and Andy Bruce

LONDON, Aug 1 (Reuters) - The Bank of England cut its growth forecasts on Thursday in the face of increased Brexit worries and a slowing global economy, but gave no indication it was considering lowering interest rates like other central banks. A day after the U.S. Federal Reserve reduced interest rates for the first time since the global financial crisis, the BoE said it still expected to raise rates gradually - though this now hinged on a global pick-up as well as a "smooth" Brexit. BoE policymakers voted 9-0 to keep rates unchanged at 0.75%, as expected in a Reuters poll of economists, and said interest rates could move either way, whatever form Brexit takes. With new Prime Minister Boris Johnson committed to taking Britain out of the European Union on Oct. 31 - regardless of whether he can secure a transition deal - markets see increased risks of a disorderly, no-deal Brexit. The BoE said this had led to "a marked depreciation of the sterling exchange rate" - which is near a three-year low against a basket of other major currencies - and that as of mid-July, business uncertainty about Brexit had become "more entrenched". "Underlying growth appears to have slowed since 2018 to a rate below potential, reflecting both the impact of intensifying Brexit-related uncertainties on business investment and weaker global growth on net trade," the BoE said. The BoE's forecasts assume Britain avoids a Brexit shock, but still foresee growth of 1.3% for 2019 and 2020, down from 1.5% and 1.6% respectively in its last forecasts in May. This leaves British economic growth roughly in line with that of the euro zone, which Britain used to regularly outperform before June 2016's referendum decision to leave the EU. RATE CUT BETS The weaker growth outlook comes despite implicit stimulus from market expectations of an interest rate cut that the BoE mechanically factors into the forecasts. Before Thursday's announcement, markets priced in an almost 90% chance that the BoE will cut rates by 25 basis points before Governor Mark Carney steps down at

the end of January .

In large part, this reflects the risk of a significant loosening of BoE policy if there is a no-deal Brexit, to which economists polled by Reuters on average gave a 30% probability last month. The European Central Bank is expected to cut rates in September. Carney will say more about the BoE's thinking in a news conference at 1130 GMT. The updated BoE forecasts show the central bank expects inflation - currently on target at 2% - to exceed its target in two and three years' time, and by a greater margin that it predicted in May. The BoE said growth and inflation would both probably be slower in the case of a smooth Brexit than its forecasts show, due to a likely snap back in sterling and in market interest rate expectations. Taking this into account, inflation in three years' time would not necessarily exceed the BoE's target, but the BoE still foresaw the domestic economy overheating, requiring higher interest rates. (Reporting by David Milliken and Andy Bruce)