The City reacts to sharp UK GDP slowdown saying the chances of a May interest rate rise are slim to none
The big news of this morning with the UK economy growing more slowly than expected during the first quarter sent the pound falling as attention turned to the prospects of a May rate rise.
GDP grew by 0.1 per cent during the first three months of the year, down from 0.4 per cent in the previous quarter, according to the Office for National Statistics.
And reaction from the City is coming in, saying this has hit the chances of a May interest rate rise.
Read more: UK economic growth slows more sharply than expected sending the pound down
“All but ended any hopes for a May rate hike”
David Cheetham, chief market analyst at XTB, said: “The data of late has been consistently below forecasts and this now means that a move to increase next month would be a very bold call from Carney and in all likelihood the bank will decide to stand pat.”
He added:
Today’s disappointing data has all but ended any hopes for a May rate hike, with Carney and his fellow MPC members surely now likely to stand pat and bide their time before tightening policy further.
Given the anaemic levels of growth in Q1 an increase in rates would threaten to tip the economy into recession and even though inflation continues to run well above target, it has shown signs of reaching a high-water mark of late with notable declines in recent months and this is really the only piece of economic data supportive of a hike.
Focus on pay growth improvement over “what may well prove a temporary slowdown”
Chris Williamson, chief business economist at IHS Markit, said: “UK economic growth slowed to near stagnation in the first quarter, casting further doubts on the health of the economy and seriously knocking the case for the Bank of England to raise interest rates again in May.
However, Williamson added:
Even with the sharper than expected slowdown, the Monetary Policy Committee may be inclined to look through what may well prove a temporary slowdown, and instead focus on signs that pay growth is improving (recent official data showed private sector pay growth accelerated to three per cent in the three months to January, and the unemployment rate slipped back to 4.3 per cent, its joint-lowest since the 1970s, underscoring the tightness of the labour market).
As such, a May rate hike would still be on the cards.
However, it’s likely that it will require a solid rebound in April to persuade the majority of the MPC that the economy has regained sufficient growth momentum to warrant higher interest rates.
June rate rise on the cards instead
Dr Howard Archer, chief economic advisor at EY Item Club, said: “While growth in the first quarter was clearly savaged by the Beast from the East, the extent of the slowdown suggests there may well have been a significant underlying loss of momentum in economic activity in addition to the weather impact.”
He said:
We now believe the Bank of England is more likely than not to sit tight at the May MPC meeting. However, we suspect that this delay will prove short-lived and expect the Bank of England to hike rates in June as the economy shows improvement from the first quarter slowdown and the MPC looks to gradually normalize monetary policy.
Bad weather impact overstated
Jacob Deppe, head of trading at online trading platform Infinox, said:
If, as the Office for National Statistics (ONS) itself said, the impact of snow on economic activity was small, the chances of a second quarter bounce will also be lower.
That the downturn in economic activity was also broad-based will be a concern for Bank of England policymakers. An interest rate hike in May now looks very much like a dead duck.
Read more: Coming, ready or not! – UK interest rate rises are on the way