August 10, 2016 / 2:12 PM / 12 days ago

CORRECTED-Bank of England holds rates steady, keeps post-Brexit options open

 (Corrects reference in paragraph 13 to implied interest rate
path in August Inflation Report)
    By David Milliken and Alistair Smout
    LONDON, Nov 1 (Reuters) - The Bank of England kept interest
rates steady on Thursday and hinted at slightly faster future
rate rises if Brexit goes smoothly, but warned all bets were off
if next March brought a "disruptive" EU departure.
    The BoE said its nine rate-setters voted unanimously to hold
 interest rates at 0.75 percent, in line with expectations in a
Reuters poll of economists, after raising them in August for
only the second time since before the financial crisis.
    Brexit is now dominating the economic outlook for the
world's fifth largest economy, which has seen growth slow since
June 2016's referendum to leave the European Union, and most
economists do not expect rates to rise again until mid-2019.
    The BoE said consumer spending had performed better in
recent months than it had expected, but businesses were holding
back investment until there was clarity about future ties with
Britain's biggest trade partner.
    Prime Minister Theresa May has yet to secure a transition
deal that will ensure goods and people can continue to move
freely between Britain and the EU after Brexit on March 29.
    "The recent intensification of Brexit uncertainty appeared
likely to keep business spending subdued in the near term," the
BoE's policymakers said.
    The BoE said a disruptive Brexit could see inflation
pressure from a weaker currency, a damaged supply chain and
possible trade tariffs. Against that, policymakers would need to
balance the hit to growth from lost trade, greater business
uncertainty and tighter financial conditions.
    "The monetary policy response to Brexit, whatever form it
takes, will not be automatic and could be in either direction,"
the BoE said, echoing previous remarks by Governor Mark Carney.
    Assuming Brexit goes smoothly, the economy was likely to
continue to grow by around 1.75 percent a year, the BoE said.
    This is some way below the rate of above 2 percent that was
typical before Britain voted to leave the EU, but the BoE said
the economy was at full capacity and inflation would take three
years to drop from 2.4 percent now to its 2 percent target.
    The economy was expected to start running above capacity
late next year, sooner than the BoE had forecast in August.
    "A margin of excess demand is ... expected to build, feeding
through into higher growth in domestic costs," the BoE said.
    This inflation worry comes despite the fact that this set of
BoE forecasts pencils in almost three quarter-point interest
rate rises over the next three years, compared with just over
one in the forecasts accompanying August's rate rise.
    Although these assumptions are based on market pricing --
and are not a commitment to raise rates by the BoE -- they give
some indication of how fast the BoE thinks interest rates will
need to rise to return inflation to target.
    Despite the excess demand and recent faster-than-expected
pay growth, the BoE's medium-term pay forecasts were unchanged
from August, seeing growth of 3.25 percent by the end of next
year and 3.5 percent in late 2020.
    Carney is due to give a news conference to explain the
central bank's latest thinking at 1230 GMT.

 (Reporting by David Milliken)
  
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