On Wednesday, the Bank of England (BOE) cut its forecasted growth for the U.K. economy, but the bank still aims at raising interest rates in the middle of 2016 from its current historic low.
In its quarterly inflation report, the BOE indicated expectations of a 2.5% expansion in the U.K. economy in 2015 as well as a 2.6 percent growth in 2016. This was down from their forecast in February of a 2.9% growth for both 2015 and 2016.
The central bank stated that their new weaker outlook takes into consideration other factors such as the recent strength of the British pound (GBP), a slowdown in the housing market as well as weak productivity.
In addition, the bank stated that the potential risk of a messy end to the efforts by Greece to reach a fresh deal with international creditors regarding financial aid paybacks, casts a dim outlook on the U.K.’s prospects.
The new forecast follows just days after David Cameron was re-elected to govern the kingdom with a majority in parliament. This came after 5 years of coalition government.
Globally, central banks are trying to cope with inconsistent growth and passive inflation. Later this year, the U.S. Federal Reserve expects to hike short-term interest rates. In a bid to return inflation to its nearly 2% yearly target, in March this year, the European Central Bank (ECB) embarked on an asset purchase program hoping to lift growth in the nineteen nation currency union.
Regardless of the weaker growth forecast, the BOE says that it expects inflation to increase to the 2% annual target by around 2017, provided that interest rates rise in the U.K. in line with financial markets expectations.
Currently, investors expect the BOE to increase its interest rate benchmark from 0.5% in mid-2016, according to the BOE’s report.
Following the oil price collapse, annual inflation is at zero; however, officials say they expect that price-growth will get stronger towards the end 2015.
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