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November 4, 2016

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BOE scraps plan to cut interest rates

THE Bank of England scrapped its plan to cut interest rates and said borrowing costs could now move in either direction as the slide in sterling following the Brexit vote prompted it to ramp up its forecasts for growth and inflation in 2017.

The battered pound extended its gains on the day and British government bond prices fell after the BOE shifted to what Governor Mark Carney called “a neutral stance” on what its next move on interest rates would be.

The central bank, which has come under heavy political criticism for its near-zero rates, sharply adjusted its view of when Britain’s economy will feel the pain of June’s referendum decision to leave the European Union.

In a set of quarterly forecasts published yesterday, it largely reversed its previous view of a major hit to growth next year, raising its forecast to 1.4 percent from an estimate of 0.8 percent made in August.

But it warned that Britain’s access to EU markets in the future could be “materially reduced,” which would hurt growth over “a protracted period,” and forecast a slower recovery for 2018 and 2019.

The BOE responded to the Brexit vote by cutting interest rates to a record low of 0.25 percent in August and restarted its massive bond-buying program for the first time since 2012.

It said then that another rate cut was likely this year if the economy slowed as it expected.

Critics of the BOE, many of them supporters of the successful campaign to quit the EU, accused Carney and his fellow policy-makers of overstating the potential hit to the economy from the referendum result.

Asked at a news conference about the sharp changes to the BOE’s view on growth in 2017, Carney said that in “broad-brush” terms, the BOE was sticking to its view made in August of what the economy will look like in three years’ time.

“We end up basically in the same place as the economy after a substantial stimulus package from the Bank of England, and from stimulus from a fairly sharp depreciation in the currency — so broad-brush, that’s there,” he said.

The BOE’s policy-makers voted 9-0 at their November meeting to keep rates on hold at 0.25 percent.


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