All eyes on Bank of England governor Mark Carney as rates decision due tomorrow
The chances of the Bank of England (BoE) not raising interest rates in May seemed inconceivable just a few months ago.
Back in February, BoE deputy governor Ben Broadbent said that it would not be a “great shock” to the economy if the Bank raised interest rates twice this year.
Now, it will be a shock if rates rise at all.
Read more: Consumer confidence rises to 14-month high to add to puzzle for BoE
The chances of a rate rise dwindled sharply after a string of poor economic results in recent weeks, with April’s disappointing GDP growth of just 0.1 per all but dashing hopes of a hike.
“Back in early April, a rate rise at the May meeting was so widely predicted that it seemed nailed on,” said Sarah Coles, personal finance analyst at Hargreaves Lansdown.
“However, over the past few weeks, the picture has changed dramatically. A slew of disappointing data, and efforts by Mark Carney to talk down the chances of a rate rise, mean the markets are now pricing in the chance of a rise at just eight per cent.”
Though the FTSE has performed well of late, edging back up over the 7600 mark mark, the stock market’s gains have been outweighed by a slew of economic indicators which are likely to steady Carney’s hand.
Read more: Another interest rate rise would be a huge policy mistake
Consumer spending has plummeted, with the British Retail Consortium (BRC) today announcing that UK retailers saw the sharpest sales drop on record last month.
Meanwhile, house prices have continued to tumble, falling over three per cent in April according to the latest research from UK bank Halifax.
Along with disappointing wage growth and a slowdown in UK manufacturing, things are looking grim, and City A.M.’s shadow monetary policy committee (MPC) has voted almost unanimously in favour of holding interest rates steady.
The shadow MPC’s votes
Joanna Davies, senior economist at Fathom Consulting and guest chair
HIKE Long before it became fashionable, Fathom Consulting pointed to low interest rates as the reason for the UK’s dire productivity performance, arguing that ‘too low for too long’ was damaging the supply side by preventing the gales of creative destruction. With Brexit layered on top, we correctly forecast that the UK economy would lose steam this year, with an evens chance of recession. Recent data support that view, but low rates are doing more harm than good.
Jeavon Lolay, head of economics and strategy at Lloyds Bank Commercial Banking
HOLD First quarter weakness should prove temporary, but signs of firmer demand are needed before a rate rise, possibly later this year. Spare capacity appears limited and earnings growth is steadily rising.
Vicky Pryce, chief economic adviser, CEBR, and former joint head of the Government Economic Service
HOLD Consumers’ optimism is declining again, housing market is showing renewed weakness, growth has slowed down markedly and the inflationary pressures from the pound’s post referendum weakness are easing.
Simon Ward, economic adviser at Janus Henderson Investors
HOLD Unit wage cost growth is well above 2% but money trends suggest further economic weakness – non-financial M1 and M4 have risen by only 1% at an annualised rate since the November rate increase. Wait for a monetary recovery before hiking again.
Mike Bell, global market strategist at JPMorgan Asset Management
HOLD Weak Q1 GDP growth, a sluggish housing market, inflation that is likely to fall faster than expected and ongoing Brexit uncertainty offset rising wage growth and low unemployment in my mind, at least for now.
Ruth Gregory, UK economist, Capital Economics
HOLD Given the softer-than-expected inflation figures, and signs that the recent slowing in growth has not entirely been driven by weather effects, I would leave interest rates on hold for now.
Tej Parikh, senior economist at the Institute of Directors
HOLD It’s unclear just how much of the slowdown in Q1’s economic growth was attributable to temporary factors, and evidence of imminent wage growth remains thin. With that backdrop, wait-and-see is the safest call for now.
Kallum Pickering, senior UK economist at Berenberg
HOLD The downside surprise to Q1 GDP growth requires caution before hiking again. Better to hold rates until there is clear evidence that growth is sustainably improving in Q2.
Simon French, chief economist at Panmure Gordon
HOLD There are increasing economic headwinds from increased pension contributions, higher council tax bills, a working age benefit freeze and higher fuel costs. Pausing the reinvestment of maturing Gilts represents a better starting point for policy normalisation.