Carney warns of ‘challenging time for households’ as interest rates kept at 0.25%
12 May 2017
Bank of England governor Mark Carney has warned the squeeze on households has begun as Brexit-fuelled inflation outstrips wage growth.
Mr Carney said consumers were beginning to feel the pinch as the pound's plunge since the Brexit vote has pushed up prices.
"This will be a more challenging time for British households over the course of this year," he cautioned.
The gloomy comments came as the Bank kept interest rates on hold at 0.25% and nudged down its growth forecast to 1.9% for 2017 from 2% in February, cautioning that a "slowdown appeared to be in train" after a sharper-than-expected fall in consumer spending.
Growth slowed sharply to 0.3% in the first three months of the year from 0.7% in the previous three months.
The Bank said, while it expects first-quarter expansion to be revised higher to 0.4%, the economy would likely continue at a "similarly moderate pace of growth in the second quarter and beyond".
The pound fell on the growth cut, down 0.4% at 1.29 US dollars and 0.4% lower at 1.19 euros.
But the Bank said this year would be the worst for the pressure on household finances, with wage growth set to pick up over the next three years, while the wider economy will also strengthen.
Mr Carney said: "Wages are still growing and we expect the pace of growth will accelerate as this year progresses and continue into 2018 and 2019."
"Real income growth will return."
The report, released alongside the rates decision, also offered some cheer for the growth outlook as forecasts were raised to 1.7% for 2018 and 1.8% in 2019 from February's prediction for 1.6% and 1.7% respectively.
The Bank said growth would be supported by a recent recovery in business investment and higher exports amid a bounce-back in the global economy.
While inflation, currently at 2.3%, would likely peak at close to 3% in late 2017, the Bank said the pound’s gain since the General Election would help inflation ease back in 2018 and 2019.
But Mr Carney stressed the forecasts were based in part on “the adjustment to the UK’s relationship with the EU being smooth”, with expectations the Government will introduce a transition period to avoid a cliff-edge departure from the single market.
Mr Carney said forecasts also assumed a “significant” pick-up in wage growth, due in part to business concerns over the Brexit process starting to ease.
But if wage growth fails to rise, “there will be consequences”, the governor warned.
Minutes of the rates meeting showed seven MPC members voted to keep rates unchanged, while outgoing policymaker Kristin Forbes remained the sole dissenter, repeating her call for a rise to 0.5% on worries over rising inflation.
The minutes suggested the next move in rates would still be a rise, with other MPC members repeating it would take “little further upside news” to consider joining Ms Forbes in voting for a hike.
The Bank added that financial market assumptions for just one rate rise to 0.5% in 2020 would not be enough to rein in inflation.
But economist Howard Archer at IHS Global Insight said rates were still set to remain on hold until at least 2019.
He said: “We maintain the view that the Bank is being too upbeat on the growth outlook with some pretty optimistic assumptions, particularly relating to the likely pick-up in wage growth.
“We also think Brexit uncertainties will hamper growth.”
Adrian Dennis/PA Wire