LONDON • Economists abandoned predictions that the Bank of England (BoE) will increase interest rates next month after two weeks of disappointing data and the public doubts of Mark Carney.
The shock near-stagnation of the economy proved the final straw after the BoE governor raised questions about such a move the previous week. Firms including NatWest Markets, SEB AB, Berenberg and ING have now withdrawn their predictions for May, while UBS AG said it now sees no moves until at least 2020.
After raising borrowing costs for the first time in over a decade in November, policymakers signalled they may need to speed up tightening to get inflation back to their 2% target. Now, as it cools faster than expected, output sputters and Brexit clouds the horizon, officials may no longer be able to justify raising interest rates, at least for now.
“It just doesn’t feel right anymore,” said ING chief international economist James Knightley. “There’s still the possibility of August, but we are very concerned about the UK household sector. There’s a very narrow window for a hike and that window is going to be shrinking because of this.”
Bloomberg’s latest survey of analysts, carried out before the previous week’s data, showed about three quarters predicted an increase next month. Investors, who were quicker to react to Carney’s intervention last week, now see just a 20% chance of a move next month, down from around 90% earlier in April. The pound fell as much as 1% last Friday.
“The committee will pass up the chance to hike in May. The possibility that today’s data is a sign of weaker underlying growth, plus the faster drop off in the Consumer Price Index inflation seen in recent releases, provides enough uncertainty about where inflation could settle in two years’ time to hold off for now,” said Jamie Murray and Dan Hanson from Bloomberg Economics.
There are also signs of slower growth in the euro-area, where France saw the expansion slow by more than half in the first quarter (1Q). The signs of a global slowdown have prompted central banks the world over to endorse a go-slow approach to exiting a decade of extraordinary stimulus after the financial crisis.
The past two weeks have taken investors and economists back to square one for their BoE outlook.
While most were expecting policymakers to follow a gradual path after November’s move, bets on a May move gathered momentum in early 2018, before solidifying after officials said in February that they would have to raise rates faster, and to a greater extent, than they previously thought. Those expectations remained heightened until the previous week, when data showed inflation slowing faster than the bank had predicted and retail sales plunging.
Then Carney said on April 19 that policymakers are “conscious that there are other meetings” at which they could act this year, which investors took as a cue to recalibrate their expectations.
Last Friday’s report, which showed the worst performance since the end of 2012, proved the final nail in the coffin for many. While there was some impact on growth from snow, statisticians said the overall effect was limited, calling into doubt the underlying strength of the economy.
It may also add to concern that as global growth moderates, the nation is losing a key buttress of support that helped it weather Brexit uncertainty last year.
“The slow-motion slowdown we have warned of many times is continuing to materialise,” said UBS strategist John Wraith. “With inflation likely to return to target within the next three to six months, we believe the case for higher rates will look increasingly threadbare from both real activity and inflation standpoints.”
As banks dump their May fore- casts, they are split on the timing on the BoE’s next move. NatWest forecast a move in August; Berenberg said November is a more likely month, a view shared by investors, while SEB predicted nothing until next year. UBS, meanwhile, said it is now reverting to its prior forecast of the BoE remaining on hold over the firm’s forecast horizon, which goes through to the end of 2019.
With the gross domestic product number based on less than half the data that will eventually be available and weather-affected quarters notoriously volatile, some analysts are stick- ing to their guns. Barclays said the BoE will have “reasons to believe that 1Q soft data are temporary”, and will push ahead with a hike next month. — Bloomberg
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