BoE Warns Of Increasing Squeeze On Consumers Spending In 2017

Bank of England (BoE) governor Mark Carney has issued a warning that UK’s consumer spending may drop this year as a result of rising inflation and a decline in real wages. Presenting an assessment of the UK economy ahead of the general election, Carney has forecasted that the living standards of British households is likely to be hit this year but will start recovering in 2018.

Carney believes a smooth Brexit is critical for the recovery, highlighting the fact that inflation was currently at its highest in three years and was bound to rise further due to the pound weakening. A February forecast for inflation put it at 2.4 percent for this year but the latest Quarterly Inflation Report has increased it to 2.7 percent. Carney stated that raising interest rates would not be an effective method to tackle the issue.

Though wage growth wasn’t keeping pace with inflation right now, Carney was optimistic about its outlook for next year. He observed that companies were possibly not raising wages currently due to the prevailing uncertainty.

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In a statement, Lucy O'Carroll, chief economist at Aberdeen Asset Management said

The Bank of England is stuck between a rock and hard place. It has to base its forecasts on a view of the Brexit deal but, with so little to go on at present, it's not an easy judgement. To say that is far from certain is a huge understatement. Governor Carney acknowledges the risks, but the weight of uncertainty – and therefore frailty of the forecasts – does undermine the Bank's relatively positive message.

Carney’s comments came as the latest report from the BoE showed a drop in UK economic growth forecasts for 2017, slashing it from 2 percent to 1.9 percent. The bank has also retained the interest rates at 0.25 percent. According to Carney, a smooth Brexit would be one where the UK is successful in securing an agreement regarding trading relationships and puts in place a transition period for the intervening time.

Paul Hollingsworth, of the consultancy Capital Economics has predicted that the interest rates would be raised sooner than anticipated citing comments in the recent inflation report. Policymakers are hoping that the reduction in consumer spending would be offset by a growth in business investment and trade as a weak pound boosts exports.

Some market analysts are skeptical of Carney’s optimistic outlook. Suren Thiru, head of economics at the British Chambers of Commerce has stated that the inflation rate would hurt economic growth more than expected and the wage growth is likely to remain below price growth for the next few years.

Charlie Harrison

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