Bank of England Super Thursday: three key things to look out for

Today we get a triple brain dump from the Bank of England including an interest rate decision, minutes from the MPC meeting, and a Quarterly Inflation Report which gives us the central bank’s latest forecasts for the UK economy. Laith Khalaf, senior analyst at Hargreaves Lansdown, tells us what to expect.

Here are three key things to look out:

1. GDP Forecast

Since its gloomy report in the immediate aftermath of Brexit, the Bank has been gradually upgrading its forecast for GDP growth as economic activity has remained surprisingly robust in the face of Britain’s forthcoming withdrawal from the EU.

The table below shows how the Bank’s economic forecasts have changed since the lead up to the EU referendum.

Since the November Inflation report there has been further positive data from the UK economy. In particular:

• the latest PMI reading for the services sector, accounting for around 80% of the UK economy, signalled 5 consecutive months of growth at the end of 2016, with a particularly sharp uptick in December.
• retail sales for the final quarter of 2016 rose by 5.9% compared with 2015, helping to drive the economy to GDP growth of 0.6% in Q4 2016.
• The latest labour force figures show unemployment remains at an 11 year low of 4.8%, and wage growth perked up to 2.8% at the end of last year.

Any revision to the economic growth forecast is likely to be upwards, though it’s still likely to be lower than the estimate issued by the central bank before the EU referendum.

So far it looks like the Bank of England was wide of the mark in predicting the effect of Brexit on the UK economy, though we shouldn’t count our chickens just yet as shifts in economic activity can take a long time to register.

In its defence the Bank of England is always at pains to point out that its central forecasts are one of a range of possible outcomes. It shouldn’t come as a huge surprise that the crystal balls inside Threadneedle Street are just as cloudy as those outside when it comes to predicting the impact of something as unique and unpredictable as the country’s withdrawal from the EU.

2. Inflation forecast

While the UK’s economic output is still highly uncertain as Brexit takes shape, rising inflation is pretty much nailed on for the coming year. Rising commodity prices and the fall in the pound mean we are in for a year of rising consumer prices.Petrol prices up 17% on a year ago and a swathe of retailers has warned of increasing import costs thanks to weaker sterling. The table below shows the shifting inflation expectations of the Bank of England.

The Bank of England’s inflation forecasts have tracked gradually higher over time, though to date the Bank remains convinced that rising inflation is a short term problem. However for consumers this still means a pinch on household budgets this year unless we see some pick-up in wage growth.

Likewise real returns from cash have been flattered by low inflation for the last couple of years; that looks like coming to an end as rising prices mean the buying power of cash on deposit can be expected to go noticeably backwards this year.

3. Interest rates

No-one is expecting any movement on interest rates. Markets are pricing in a 98% chance of rates being kept on hold at 0.25%.

At the last meeting in December the MPC was unanimous in voting to keep rates on hold so the key thing to watch this time around will be if any voices of dissent appear and start calling for a rate hike.

Looking at the big picture, irrespective of when interest rates go back up to 0.5%, they are still going to remain low for some considerable time to come.

Below is the market expectations of base rate published by the Bank of England in the November Inflation Report. The implication is that we will still be at or around the ‘emergency rate’ of 0.5% as we head into the next decade.

Of course, market expectations could be proved wrong, and indeed they have been in recent years but that’s because expectations for interest rates were pitched too high, not too low.

The minutes of the MPC meeting will be pored over for any whiff of an interest rate rise but the reality is that, whether there’s a hike this year or not, rates are set to remain low for some considerable time. Cash savers continue to suffer from low returns on their deposits, and that pain is about to be compounded by the return of inflation.