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Bank of England's growth and pay forecasts too optimistic - Reuters poll
May 18, 2017 / 8:17 AM / 2 months ago

Bank of England's growth and pay forecasts too optimistic - Reuters poll

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A man walks past the Bank of England in the City of London, Britain April 19, 2017.Hannah McKay

LONDON (Reuters) - The Bank of England's growth and wage forecasts are too rosy, according to economists polled by Reuters who were divided on what a large Conservative majority in June's UK election would mean for Britain's divorce terms from the EU.

BoE Governor Mark Carney said the forecasts hinged on a "smooth" transition to Brexit, as well as a big pick-up in wage growth and stronger exports and investment -- things the central bank has predicted before, but which have largely not materialised.

Wage inflation would rise to 3.75 percent in 2019, the Bank said. But all except four of the 26 economists polled this week who answered an extra question said that was unlikely or very unlikely. The median forecast was 3.1 percent.

"The risks have in our view shifted towards a hard Brexit, in which case the UK economy in 2018-2019 will be facing headline-grabbing reductions of UK operations by foreign corporations, relocation to continental Europe and lay-offs," said Marius Gero Daheim at SEB.

"This environment does not bode well for pay increases in the order of 4 percent."

British pay growth lagged inflation for the first time in 2-1/2 years in early 2017. Excluding bonuses it rose 2.1 percent year-on-year in the three months to March, the weakest increase since July, data showed on Wednesday.

Since last June's referendum vote to leave the European Union, Britain's stance has hardened. Prime Minister Theresa May has said she expects divorce talks to be tough and EU leaders have agreed stiff terms.

Previous Reuters polls have concluded that talks turning fractious would pose the biggest risk to Britain's economy and to the pound. [GBP/POLL]

Hoping to build a dominant position in parliament and strengthen her hand in the EU talks, May has called a snap election for June 8.

Her ruling Conservative party has a runaway lead in opinion polls, a result which could give a vote of confidence in a vision for Brexit which now sees the country outside the EU's single market.

But most respondents who answered an extra question did not take that view. A dozen said if the opinion polls were correct and the Conservatives get a sizeable majority, there would be no effect on the success of Britain's divorce negotiations.

Nine said that outcome would bring about a more constructive relationship while six said it would add distance between the two sides.

Stimulating Sterling

Last week the central bank said Britain's economy would grow 1.9 percent this year, 1.7 percent next and 1.8 percent in 2019 but median estimates in the poll were all lower -- respectively 1.7, 1.4 and 1.5 percent.

Only 10 of the 60 economists polled were as or more upbeat about growth prospects this year than the Bank. For 2018 the ratio was 11 of 58.

"The BoE's growth forecasts appear too optimistic. They are conditional on a very smooth Brexit, which is unlikely," said Daniel Vernazza at UniCredit.

Sterling is down well over 10 percent from levels ahead of the June referendum and its weakness is stimulating domestic inflation. It is unlikely to move far in the coming year, according to a Reuters poll earlier this month.

Consumer prices rose an annual 2.7 percent in April, official data showed on Tuesday, and they look set to rise further due to the fall in the value of the pound and a recent rise in global oil prices.

It will average 2.6 percent this year and next and then dip to 2.3 percent in 2019 -- still above the BoE's target of 2 percent.

But with the path for growth uncertain, the Bank is expected to look through that and keep interest rates at their current record low of 0.25 percent until 2019, the poll found.

"Once again in its May Inflation Report, Governor Mark Carney insisted that the overshoot of its 2 percent target was 'entirely' driven by the fall in sterling," said Elizabeth Martins at HSBC.

"We agree with Mr Carney: this is imported, not domestically generated inflation. We see UK rates on hold this year and next."

Polling by Sujith Pai and Vartika Sahu; Editing by Ross Finley and Catherine Evans

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