Bank of England cuts forecast, warns on global headwinds


The Bank of England said that policymakers had cut the economic forecast for Britain, warning of global “headwinds” from the slowdown in Asian giant China as well as other emerging economies.

The central bank’s nine-member Monetary Policy Committee (MPC) also kept its key interest rate at a record low 0.5 percent and maintained the level of cash stimulus pumping around the British economy at £375 billion ($578 billion, 516 billion euros).
Policymakers “voted by a majority of 8-1 to maintain bank tate at 0.5 percent,” the BoE said in minutes published after its scheduled monthly meeting.
The MPC was unanimous in its decision to keep the stimulus, known as quantitative easing, at the same level once again.
On a gloomy note, the bank forecast that British economic growth would slow to 0.6 percent in the third quarter after a stream of weaker-than-expected economic data.
That marked a downgrade from the previous guidance of 0.7-percent expansion — which would have matched growth in the second quarter.
“On balance, the downside risks to world activity had probably increased,” the minutes read, but noted that the Greek financial crisis was less of a threat.
The MPC instead highlighted concerns over China’s economic slowdown, which has caused severe market turbulence in recent weeks, and the prospect of an interest rate hike from the US Federal Reserve.
“The outline agreement between Greece and its euro-area partners had reduced the likelihood of further harm to activity and confidence from that source, at least in the near term,” the minutes read.
“By contrast, concerns about China and other emerging economies had grown. This had resulted in sharp falls in the prices of risky assets, including in advanced economy markets, and declines in commodity prices.”
Policymakers meanwhile stressed any increase in borrowing costs would be gradual and depend on the outlook.
“All members agree that, given the likely persistence of the headwinds weighing on the economy, when bank rate does begin to rise, it is expected to do so more gradually and to a lower level than in recent cycles.
“This guidance is an expectation, not a promise. The actual path that bank rate will follow over the next few years will depend on the economic circumstances.”
Bank governor Mark Carney had indicated in July that interest rates could begin to climb around the turn of this year.
The BoE is tasked with using monetary policy as a tool to try and keep 12-month inflation close to a government-set target of 2.0 percent — significantly above the current level. Britain’s annual Consumer Prices Index (CPI) inflation rate rose to 0.1 percent in July, up from zero in June.
Markets are closely tracking inflation, which has been kept low in recent times by falling energy and food prices, for indications of when rates will start to rise.
At the same time, however, policymakers are mindful of downside risks to the economy.
“It is global conditions which are concerning policymakers and tipping the scales in favor of inaction,” said Hargreaves Lansdown economist Ben Brettell.
“The concerns are numerous. A slowing Chinese economy and devaluation of the yuan, concerns over the health of other major emerging markets, and the resulting volatility in commodity prices could all create headwinds for the UK economy.
“Today’s minutes noted that global developments were not yet sufficient for the bank to change its outlook, but downside risks ‘merited close monitoring’ in the coming months.”


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