Bank of England boss Mark Carney has said interest rate hikes are still on the cards after Britain’s growth outlook was upped this year despite Brexit uncertainties.
The Bank held rates at 0.75%, but Mr Carney stressed that financial market expectations that a hike will not come until the end of 2021 would not be enough to keep inflation to the 2% target.
He said a Brexit resolution with a smooth transition will require “more frequent” rate increases, although he stressed these would be limited and gradual.
The comments came as the Bank upped its growth forecast to 1.5% this year, up from the paltry 1.2% predicted in February thanks largely to a more stable global economic outlook.
It also increased its gross domestic product (GDP) growth outlook to 1.6% in 2020 and 2.1% in 2021, up from 1.5% and 1.9% previously.
Mr Carney said: “We could see a period where the economy is growing and pressures continue to build despite this uncertainty.
“If a Brexit resolution is some form of arrangement with some smooth resolution to it, it will require rate increases, and more frequent rate increases than the market currently expects.”
The Bank’s latest quarterly inflation report revealed it expects a first-quarter growth spurt thanks to Brexit stockpiling, but cautioned the boost will prove to be temporary as uncertainty reigns.
In minutes of the unanimous rates decision, the Bank said it now expects growth to surge to 0.5% between January and March, up from 0.2% in the final quarter of 2018, after firms stockpiled heavily in the run-up to the original March 29 Brexit deadline.
But it warned the fillip with fade fast, with growth set to slow sharply to 0.2% in the second quarter and remain “subdued” in the face of Brexit uncertainties.
Mr Carney stressed that while the global economic outlook has improved, “domestic tensions remain”.
The Bank report warned the Brexit delay to October 31 will only prolong the slump in business investment, which has been falling for a year as firms put spending decisions on hold amid uncertainty over a Brexit deal.
Mr Carney said: “The latest business investment intentions surveys point to further declines over the next few quarters, which would mark the longest run of falling investment in the post-war era.”
The Bank said in spite of the first-quarter growth boost, the underlying rate of expansion is “slightly stronger than previously anticipated, but marginally below potential” in the face of Brexit uncertainty.
It added: “As new Brexit deadlines approached, it was possible that businesses would continue to worry about adverse outcomes and delay capital spending as they waited for a resolution to emerge.”