UK rate cut on the cards despite inflation jump

Added 22nd November 2016

The Bank of England is likely to cut rates yet again in 2017 despite the return of significant inflation to the economy, according to UBS Wealth Management.

UK rate cut on the cards despite inflation jump

UBS economist Dean Turner expects growth in the UK economy to slow in 2017, leading governor Mark Carney and his monetary policy committee colleagues to cut the interest rate from the already ultra-low 0.25% to 0.10%.

In light of this, Turner said UBS WM has slightly upgraded its growth forecast for the UK to 1% year-on-year from 0.7% in 2017, and 0.7% year-on-year in 2018.

The twist in this tale however, is that UBS WM also expects inflation to exceed the Bank of England’s 2% target due to the lower value of the pound. Turner said he expects the figure to be 2.8% year-on-year in both 2017 and 2018.

As this higher inflation combined with lagging income growth erodes household spending, the central bank may also turn to quantitative easing once again, in Turner’s view.

“The strength of the UK economy in the wake of the Brexit vote has surprised many,” said Turner. Factors which have helped maintain business and consumer confidence following the vote include the Bank of England’s interest rate cut and extension of quantitative easing, the boost to exports and tourism from the fall in sterling, and the indication from the government that it will abandon previous fiscal targets. Yet we cannot become complacent and expect these factors to persist. We expect these positive factors to fade in 2017, causing growth to slow. It is too early to signal the all clear.”

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Alex Sebastian

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Alex joined Portfolio Adviser in April 2014 and has been a financial journalist since 2008. He has previously held editorial positions at the Financial Times Group and Euromoney Institutional Investor. Alex is NCTJ qualified and has a degree in economics from the University of Sussex.

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