By Jonathan Cable

By Jonathan Cable


LONDON (Reuters) - The tone of Britain's divorce negotiations with the European Union will be the main factor influencing the economy this year, according to economists polled by Reuters who also say the Bank of England will leave policy steady at least until 2019.


Prime Minister Theresa May has said she wants to trigger formal Brexit negotiations - beginning a two-year countdown to leaving the EU - by the end of March.


May has promised tighter control over immigration when Britain leaves the bloc, even if it means the country losing its unfettered access to the EU's single market, and has said she would prefer no deal to a bad deal.


When asked by Reuters to name the biggest downside risks to the British economy, nearly all the respondents in the poll conducted in the past week cited fractious Brexit negotiations.

Similarly, the joint most-popular factor that could cause British growth to be stronger than expected was a smooth running of the negotiations, along with consumer spending remaining strong.

"Brexit will dominate the UK's markets, economy and politics," Jacob Nell at Morgan Stanley said.

Bank of England Governor Mark Carney said this month there would be "twists and turns" on the road to Brexit as the central bank kept interest rates at their record low.

Since the June vote to leave the EU, Britain's economy has fared much better than was feared, outpacing its peers last year, owing in large part to strong consumer spending and increased consumer borrowing.

The Bank of England made a sharp increase to forecasts for economic growth in 2017 earlier this month, jacking up its 2017 growth projection to 2.0 percent from 1.4 percent. Only one of the 61 economists in the latest Reuters poll was that optimistic.

Instead, the median forecasts say the economy will grow 1.5 percent this year and 1.3 percent next. Quarterly growth will be between 0.2 and 0.4 percent through to end June 2018, the poll found.


Sterling has fallen around 15 percent against the U.S. dollar since the vote, making UK exports cheaper. But it has also driven up import costs, contributing in large part to a 20 percent annual jump in producer input costs in January.

Consumer prices are now rising 1.8 percent year on year, faster than shoppers have been used to in recent years. Inflation is predicted to average 2.6 percent this year and next, the poll found, similar to the BoE's forecasts.

"Real consumption growth is set to slow ... as real wage gains slow and employment stabilizes," said Kallum Pickering at Berenberg.

The inflation forecasts exceed the Bank of England's 2 percent target. But policymakers, who failed to get inflation close to their goal in the years after the global financial crisis, are likely to ignore the temporary impact of Britain's weak pound and maintain their ultra-loose policy stance.

After the referendum, the BoE cut interest rates to a new record low of 0.25 percent and expanded its asset purchase program. Only a few economists polled expect any further change in policy before 2018 is over.

Those who did expect change were divided over whether the BoE's stimulus for the economy would be curtailed or expanded.

On Feb. 2, the BoE also said it now believed the unemployment rate could fall to 4.5 percent - down from a previous estimate of 5 percent and below the current rate of 4.8 percent - before it starts to push up inflation.

Economists taking part in the Reuters said it could only dip to 4.7 percent, based on the median forecast.

"It is plausible that unemployment could fall some way below 5 percent in the current environment without generating a significant increase in wage inflation, so the direction of change in the Bank's estimate seems reasonable," said John Hawksworth at PwC.

(Polling by Sarmista Sen; Eiting by Ross Finley, William Schomberg and Alison Williams)