The Bank of England released its quarterly report yesterday, which revealed confirmation of a shift in expectations for economic growth in 2015. In February, the Monetary Policy Committee had predicted growth to be 2.9%, but three months later have revised this estimate to 2.5%, in light of falling food and energy prices in the first quarter.

The MPC have also adjusted the figures for expected growth for 2016 and 2017, with these forecasts dropping from 2.9% to 2.6% and from 2.7% to 2.4%, respectively. However, the report remained positive, stating: “Despite the weakness in the first quarter, the outlook for growth remains solid. Household real incomes have been boosted by the fall in food, energy and imported goods prices. The absorption of remaining slack and a pickup in productivity are expected to support wage growth in the period ahead.”

Regarding the employment factor, the Office of National Statistics revealed data this week that confirmed the rate of unemployment fell to 5.5% during the first quarter of 2015, a reduction from 5.6% on figures recorded in December 2014. As the level of unemployed people now sits at 1.82 million, this represents the lowest level on record for seven years.

Due to the rate of inflation reaching 0% at the start of 2015, wages in real terms have continuously risen, as growth in wages rose to 2.2%. This followed marked improvements in the level of employment, as 202,000 more people found work, taking the level of employment to the highest level on record. The current level of employment stands at a rate of 73.5%, with the level for male workers at its own individual record of 78.4%.

Mark Carney, the Governor of the Bank of England, commented on the data: “Productivity is projected to grow only modestly in the year ahead, before returning towards, but remaining below, past average growth rates. That recovery reflects a combination of factors. They include the lessening of compositional effects, a pick-up in the reallocation of resources to new and more dynamic firms, and the effects of the investment recovery coming through.

“The economy is growing, unemployment is falling and earnings growth has improved since the middle of last year. Indeed, temporarily negative inflation rates driven by falls in commodity prices actually boost households’ real take-home pay. In 2015 real disposable income is expected to rise more strongly than in any year since 2007.”

With an expectation that wages will continue to rise, and for the effects of reducing prices in oil begin to dampen, the MPC is predicting that inflation will move back to the 2% target outlined in its two-year forecast. This would confirm the current view expressed by many economists that 2016 will be the first time an interest rate increase will be possible.

Consultancy firm, IHS Global Insight, provided the view of their economist Howard Archer: “The inflation report suggests that interest rates will rise extremely gradually at least through to mid-2018. This is likely to be reinforced now that the Conservatives are set to press ahead with major spending cuts in the next two to three years.”

Article By: Simon Butler, Senior Mortgage Consultant at Contractor Mortgages Made Easy

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