Bank of England keeps rates at record low as economy slows

On Thursday, the policymakers erred on the side of caution, particularly after official figures showed economic growth more than halved to 0.3 percent in the first quarter compared with the previous three months.

It expects nearly no increase in real incomes this year and sluggish consumer spending, though that will be offset by investment and exports.

But while higher inflation might suggest higher interest rates, the central bank is anxious also about economic growth, which would get further hurt by a rate hike. The bank sees a slightly weaker path further out but expects inflation to be accelerating again at the end of the three-year forecast period.

The report, released alongside the rates decision, also offered some cheer for the growth outlook as forecasts were raised to 1.7 per cent for 2018 and 1.8 per cent in 2019 from February's prediction for 1.6 per cent and 1.7 per cent respectively.

Britain's economy shrugged off expectations of a recession after last year's referendum, and chalked up one of the fastest growth rates among major rich economies.

The insights from the Inflation Report are the first in weeks.

"We still think that will help some recovery in the growth rate of nominal pay over the forecast period".

The minutes from the MPC's latest meeting reiterated that the "exceptional circumstances" of the Brexit process meant it was justified in allowing inflation to significantly overshoot its two per cent target.

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Almost a decade of pay stagnation and freezes, the prevalence of zero-hour contracts-amid a mushrooming of the lowly paid and highly exploitative "gig economy"-means one third of the population are now officially below the poverty line, while more than half of all households depend upon state benefits". That will have repercussions for an economy that is highly reliant on consumer spending to drive growth.

Bank governor Mark Carney will also likely be quizzed over the outlook for consumer spending as retail sales have plunged amid the squeeze on household income from Brexit-fuelled inflation. "Household consumption growth appears to be slowing in response to the resultant weakness in real income growth".

The central bank noted that aggregate demand slowed in the first quarter, with the slowdown concentrated in consumer-facing sectors.

Against the euro, the pound was trading 0.3 per cent down at 1.18 euro. "Wages won't keep up with prices for goods and services they consume".

While the living standards of large sections of the working class are deteriorating post-Brexit, stock markets continue to show near record highs.

Mr Carney said the Bank now believed Britain's economy would grow by less than 2 per cent in 2017 after a sluggish start to the year. "For some time, the responses of financial markets and households to the UK's decision to leave the European Union have diverged", he said.

Some analysts have taken this as an urge towards UK Prime Minister Theresa May, to get a UK-EU deal rather than Brexiting without any deal at all. France's trade deficit lightened further than expected in March, and industrial production was better-than-expected in both France and Italy. The uncertainty surrounding the UK's future relationship with Europe is still also likely to weigh on investment and hiring for the foreseeable future.

At the same time, Merkel has led the EU's remaining 27 states in insisting that no concessions would be made in negotiations with the United Kingdom over the terms of its exit.

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