Business

Governor warns over 'sluggish' economy as bank keeps interest rates on hold

The governor of the Bank of England Mark Carney during the Bank of England quarterly inflation report and interest rate decision

THE governor of the Bank of England warned that the economy will remain "sluggish" as he said Brexit is hitting households and businesses.

Mark Carney said mounting uncertainty over the UK's future relationship with the EU is holding back business investment and consumer spending as the Bank cut its growth forecasts for this year and next.

The Bank kept rates on hold at 0.25 per cent as Britons suffer amid a tightening squeeze on incomes from soaring prices.

Mr Carney said Brexit uncertainty "weighs on the decisions of businesses and households and holds down both demand and supply".

He cautioned that the pressure on families would continue for the next few quarters, with Britain in the "teeth" of the income squeeze and real wages at their weakest since the middle of the 19th century.

But he said wages will start to outpace inflation next year, while growth will also begin to pick up.

The central bank boss said rates are likely to begin to rise as the economic outlook improves.

He said: "Growth remains sluggish in the near term as the squeeze on households' real incomes continues to weigh on consumption."

But he added: "Even a limited pick-up in growth is likely to have consequences for the stance of monetary policy."

Mr Carney said the Bank believes households and the wider economy could withstand a rate hike, "if appropriate".

Financial markets are pencilling in two rate rises over the next few years, though the Bank said borrowing costs may need to rise by more than the City expects.

The Monetary Policy Committee (MPC) voted 6-2 to keep rates at 0.25 per cent, with fewer members this month calling for a rise as lacklustre economic growth has weakened support for a hike.

In its quarterly inflation report, the Bank cut its forecasts for growth to 1.7 per cent in 2017 and 1.6 per cent in 2018 from 1.9 per cent and 1.7 per cent predicted in May. It maintained its forecast for growth of 1.8 per cent in 2018.

Policymakers also voted to withdraw part of the mammoth economy-boosting package unleashed a year ago in the aftermath of Brexit.

The Bank confirmed it will call time on the Term Funding Scheme to offer cheap finance to banks from next February, although it said it was now expected to offer £15 billion more under the scheme - at £115 billion.

On rates, it said "some tightening of monetary policy" would be needed to cool inflation - set to peak at close to 3 per cent in October - and by a "somewhat greater" extent than markets expect.

But the Bank stressed that any hikes would be "gradual" and "limited".

Mr Carney warned that the assumption of a smooth transition under Brexit would be "tested" over the next two years.

"If UK households and businesses look through the flurry of headlines, then the economy can be expected to pick up from its current period of sluggishness."

Sterling fell against the US dollar and the euro following the rates decision and report.

The no-change decision comes after recent disappointing growth figures have dampened mounting expectations of a hike, with GDP edging up to 0.3 per cent in the second quarter from 0.2 per cent in the previous three months.

Growth is likely to remain at 0.3 per cent in the third quarter, according to the Bank.

The decision comes a year after rates were cut to 0.25 per cent last August following the Brexit vote.

It also comes amid the first strike by Bank of England staff for 50 years, with members of the Unite union protesting over a below-inflation wage rise.

Mr Carney said it was "right that we have a limited budget relative to others in the public sector".

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