Bank of England to keep rates steady after market U-turn

May 7, 2018

The Bank of England looks set to keep interest rates on ice this week, capping a sharp swing in the outlook for the British central bank, which might now struggle to convince investors that it will raise borrowing costs at all this year. Unexpectedly weak economic data and cautious remarks from Governor Mark Carney have dashed what looked like near-certain expectations of a rate increase until a few weeks ago. Since he joined the BoE in 2013, Carney has signalled several times that rates were likely to rise, only for economic data to go the wrong way. With the prospects for Britain’s economy unclear and the terms of Britain’s departure from the European Union far from settled, Carney is likely to want to hedge his bets on Thursday.
The biggest challenge will be to keep the prospect of a further rate rise this year credible in the eyes of investors, who feel wrong-footed by a slowdown in the economy that may well prove temporary and by the BoE’s shifting guidance.
Sterling fell to its lowest since January against the US dollar on Friday as markets priced diverging prospects for growth and interest rates on the two sides of the Atlantic.
“Resetting communication after sitting out a rate hike will be an uphill task for the Monetary Policy Committee,” Barclays economists Fabrice Montagne and Sreekala Kochugovindan said in a note to clients.
“It will have to make a convincing case that softness in Q1 … is transitory,” they said. “Markets will likely be reluctant to adhere to the MPC’s rhetoric given the abrupt change in course witnessed shortly ahead of the May meeting.”
Heavy snow slowed the economies of much of Europe in March but growth was weakest in Britain, where Brexit-related pressures have squeezed consumer spending power and hurt the willingness of firms to sign off on major investments.
The BoE raised rates for the first time in more than a decade in November, and in February it said they might need to rise again more quickly than markets had expected, given the country’s long-term productivity problems.
In March, two policymakers voted for an increase and until a few weeks ago, most investors judged that the BoE was ready to join the US Federal Reserve, which has been raising rates.
But late last month, data started to raise doubts. Inflation fell faster than the BoE had expected and the economy grew at its slowest annual rate in five years in early 2018.
The central bank could choose to ignore the recently weak growth and take a longer-term view, with unemployment at its lowest since 1975 and some measures of wage growth inching up.
Economists expect that only the two policymakers who backed a rate rise in March will vote to tighten policy this month.

omanobserver