Poor data puts paid to BoE interest rate hike plans
The Bank of England decided once again to keep interest rates steady at 0.5% on Thursday. While the decision came as little surprise to markets, it marked a significant change from what was expected earlier in the year. As recently as mid-March, most commentators put the probability of a hike in interest rates in May at close to 90%.
Since then however, a raft of poor economic data has rattled market confidence and undermined the Bank’s certainty in its forecasts for the rest of the year.
Consumer price inflation fell to 2.5% in March, from 2.7% in February, its lowest level in more than a year. Then, it was announced that GDP growth for the first quarter came in at a lacklustre 0.1%, 0.3 percentage points lower than the BoE expected in February.
Market expectations of a hike were further undermined by comments by BoE Governor, Mark Carney, in mid-April. Carney said that the Monetary Policy Committee would be “conscious that there are other meetings over the course of the year” when it met in May - comments that were taken as a sign that an increase in May would be unlikely. And, on top of all that the spectre of Brexit continues to weigh heavily on the country, as there has been little progress made since the transition deal was agreed.
Speaking at the press conference following the release of the Inflation report and the MPC decision on interest rates, Carney was, however, quick to differentiate between what he called the short-term weather that had stayed the MPC’s hand in May and the longer term “climate”.
The cold spell, dubbed the Beast from the East hit the construction sector particularly badly and weighed on activity more broadly as it made it more difficult for people to get to work and to the shops, Carney said. But, he added in contrast, that the labour market has remained reassuringly strong over the period.
Likewise, while there is somewhat greater uncertainty about the near-term momentum in consumer spending given the recent weakness, consumption growth is projected to recover over the forecast period to rates “broadly in line with the subdued pace of real income growth”.
The other factor that impacted on the Bank’s decision was the strength of sterling and its impact on inflation.
In its May Inflation Report, the bank said: “The Monetary Policy Committee judges that the impact of the past depreciation of sterling on CPI inflation, while remaining significant, is likely to fade a little faster than previously thought. Taking external and domestic influences together, CPI inflation is projected to fall back slightly more quickly than in February, reaching the target in two years.”
But, as Carney was careful to reiterate, the BoE remains heavily data dependent and the likely pace of any future increases in the bank rate will be gradual.