Bank of England cuts United Kingdom growth forecasts

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The last Monetary Policy Committee (MPC) meeting saw a surprise shift in the plate tectonics among policymakers, with three of eight members voting for an increase in United Kingdom interest rates.

Economists expect the Bank to downgrade its growth forecasts when it releases its quarterly inflation report following a slump in consumer confidence and a string of weak economic data, further diminishing the chances of a hike.

THE BANK of England today cut its forecasts for the size of economy and warned that consumers face a continued squeeze on their income.

Prime Minister Theresa May has come under increasing pressure from lawmakers to end a below-inflation one per cent cap on public sector pay rises that has been in place since 2013 as part of efforts to cut government spending.

In the USA, the Federal Reserve is on course to raise short-term rates later this year, while the European Central Bank is to begin phasing out its huge bond-buying programme in 2018.

However, the central bank also sought to send a hawkish message that a rate rise could still be coming sooner than markets now expect.

By 2pm BST, the pound was 0.78% lower against both the dollar and the euro, trading at $1.3118 and €1.1062, as the common currency moved towards its highest level against sterling since November a year ago.

Lukman Otunuga, research analyst at FXTM, also highlighted how with political uncertainty, soft economic fundamentals and ongoing Brexit concerns weighing heavily on the United Kingdom economy, investors may start to question whether the BoE moves forward with raising rates in 2018. 2019 growth was left at 1.8%. He - alongside Governor Carney, deputy governors Jon Cunliffe and Ben Broadbent, new MPC member Silvana Tenreyro, and arch-dove Gertjan Vlieghe - voted to leave rates unchanged. Still the BoE is basing its long-term forecasts under a "smooth" Brexit assumption according to Carney.

However, it said it expects inflation to rise further in the coming months, and to peak at around 3% in October, with the past depreciation of sterling continuing to pass through to consumer prices.

Reports since then for the start of the third quarter have been mixed, with manufacturing boosted by the best export order growth for more than seven years, while construction endured a shock slowdown in July.

GBP/USD remains on the lower ground, around 1.3150.

This £15bn increase was due to the fact that banks had lent out more cash in the past year than expected - and bank lending is now being supported by the Bank's Term Funding Scheme.

The downturn for the British currency may be far from over, said FXTM research analyst Lukman Otunuga, blaming "the unsavoury combination of uninspiring United Kingdom economic data in July and uncertainty surrounding Brexit talks".

Inflation is expected to remain around 2.75 percent until early next year. The latest inflation report from the BoE will also drop today to provide more clues on the MPC's thinking.