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UK CommentBank of England preview: we do not expect a rate hike in May

  1. Trends in real economy and inflation appear weaker than expected
  2. Market pricing lower: indicates just two rate hikes by the end of 2020
  3. BoE probably with cautious stance next week
Disappointing data
The Monetary Policy Committee (MPC) of the Bank of England (BoE) will meet on Thursday, May 10, with its decision due to be released at 13:00 CET. The second Inflation Report of 2018, with updated forecasts and a new assessment by the MPC, will also be published on that day alongside minutes from the monetary policy meeting. At the November meeting last year, the MPC voted seven to two in favour of increasing the bank rate by 25 basis points, to 0.5 percent. The reason behind the rise was a tighter labour market and therefore a less pronounced trade-off between the real economy and inflation, according to the MPC. At its February meeting, in a unanimous decision, the BoE kept the policy rate unchanged at 0.5 percent, but indicated that the interest rate might have to be raised earlier and to a greater degree than market expectations indicated at the time. At its March meeting, the BoE also kept the policy rate unchanged, but the vote was seven to two, with the minority wanting to lift the policy rate by 25 basis points at that meeting. The likelihood of a May rate hike has, according to the market pricing, dropped from almost 90 percent in March to below 9 percent now. The reason is a string of weaker-than-expected data.
BoE probably with cautious stance next week
GDP growth in Q1 was only 0.1 percent. While the BoE had expected bad weather to weigh on GDP growth in Q1, the BoE still had expected growth to be 0.3 percent. According to the ONS, bad weather had some impact on GDP in Q1, but not a great deal. Sentiment surveys for April also indicate that the rebound at the start of Q2 was rather weak, so it appears the underlying GDP growth trend is weaker than expected. Also, inflation has been running lower than the BoE expected. While the central bank had expected CPI inflation to decelerate from 3.0 percent in January to 2.8 percent in March, the actual outturn in March was 2.5 percent. Even prior to the weak GDP numbers for Q1 and sentiment numbers for April, Governor Mark Carney had hinted that May was not a done deal for an interest rate hike. His comments had already made us doubt there would be a hike in May and with the weaker-than-expected data, an interest rate hike at next week’s meeting no longer looks likely, in our view. At the upcoming policy meeting, we will be most interested in the MPC’s comments about the outlook for further policy rate hikes. The market currently prices in just shy of one more hike this year and around two rate hikes by the end of 2020. Given the weakened momentum in the real economy and the inflation shortfall, we believe the MPC will probably take a cautious stance next week.

Disclaimer

Kari Due-Andresen

Chief Economist Norway

Norway and UK

kadu01@handelsbanken.no

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