Bank of England upgrades its view of the economy

The Bank of England (BOE) has upgraded its view of the economy, noting recent strengthening pay, keeping officials on course for future series of gradual interest-rate increases.

This is a very interesting outlook on the same day that Moody’s has indicated a significant risk of an economic downgrade for the UK should the likely “no deal” Brexit become a reality.

Policy makers said recent activity has been better than expected, raising their third-quarter estimate to 0.5% from 0.4%, according to the minutes of their latest meeting at which they left rates on hold. Officials also noted that consumer spending and pay settlements appear to have been stronger than anticipated.

However, they reiterated that Brexit is the biggest challenge to the outlook and that uncertainty about the UK’s future outside the EU has risen. With the government working on contingency plans for a no-deal Brexit, governor Mark Carney has extended his stay at the BOE until early 2020. On Thursday, he even attended a cabinet meeting to discuss preparations.

The bank’s monetary policy committee voted unanimously to hold the benchmark rate at 0.75%, after hiking it at the last gathering in early August. The central bank reiterated that "limited" and "gradual" rate increases will be needed to control inflation, and investors see the next quarter-point increase arriving in May. It was the first meeting for the BOE’s newest policy maker Jonathan Haskel, an expert on productivity.

The pound edged higher after the decision, before paring gains to trade little changed at $1.3051 as of 1.15pm in London. The bank’s analysis of financial markets revealed that there has been an increase in interest-rate options bets on a central bank interest-rate cut in 2019. Investors also see greater downside risks to the pound.

The committee also noted that risks to global growth have increased as trade tensions escalate and emerging markets become more volatile. In Turkey, the central bank jacked up its benchmark interest rate by 625 basis points to 24% on Thursday to stabilise the country’s finances. The decision came hours after President Recep Tayyip Erdogan triggered tumult by repeating his hostility to higher borrowing costs.

In Frankfurt, the ECB kept policy unchanged.

The BOE published the latest report from its agents around the country, which found that underlying consumer spending growth remains modest, and Brexit fears have contributed to a slight softening in investment intentions. However, the labour market remains tight and pay settlements have risen from a year earlier.