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Market opinion round-up: UK interest rate decision

Publication Date: 11 May 2018 - By Gaurav Sharma (Editor ReachX) By Gaurav Sharma (Editor ReachX)
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FX & Rates Macro Multi Asset FX UK

The Bank of England (BOE) held UK interest rates steady at 0.5% on Thursday (10 May), which many in the market believe was a response to a first quarter slowdown in economic growth. The move dashed market expectations of a 25 basis points rate hike. Instead the Bank’s Monetary Policy Committee (MPC) voted 7-2 to keep rates on hold at the current level. ReachX brings you the response of selected macroeconomics commentators: 

Tim Bennett, Partner at Killik & Co, said long-suffering British savers will be disappointed that rate rises have been put on hold but borrowers will be breathing a temporary sigh of relief. 

“A rate rise freeze was expected, in light of recent weak economic data. But another rise is most likely a question of when, not if. For investors, it remains business as usual - markets currently seem capable of absorbing both neutral and more hawkish interest rate policy over the medium term.”

Prof. Peter Urwin, Director of the Centre for Employment Research and Professor of Applied Economics at Westminster Business School, believes that Brexit negotiations moving forward means further rate rises over the coming year are to be expected.  

“The UK manufacturing sector is still growing, and interest rate rises are needed to get back to normal monetary conditions – inflation of 2.5% does not change this. Monetary Policy Committee members will also have been pleased with the slowdown in consumer borrowing, especially as this seems driven by tighter lending standards. Nevertheless, the decision to hold off a rate rise, which was considered very likely in March, is down to a raft of recent and worrying economic news.

“First quarter GDP growth was only 0.1% and in April manufacturing sector growth continued to slow. Inflation unexpectedly fell to 2.5% in March and a slowdown in consumer borrowing is putting further strain on the high street as well as the wider service sector that accounts for 80% of national output. However, unless the economic news worsens significantly or the Brexit negotiations collapse, we are still set for rises over the coming year.”

Abi Oladimeji, Chief Investment Officer at Thomas Miller Investment, said it was worth noting that in its latest about turn, the Bank has lowered its forecast for GDP growth for this year and also revised down its wage growth forecast, noting that the economy’s "temporary soft patch" was driven by severe weather in March.

"Unfortunately,important leading indicato rs for the UK economy were already pointing to weaker outlook for the year ahead before the incidence of bad weather in March. Failure to grasp this will inevitably lead to further flip-flopping by the Bank. Still, faced with an unanticipated loss of growth momentum, the BOE was right to be cautious. Forward guidance can be a useful weapon in central bankers’ armoury but it needs to be deployed with care.”

Rain Newton-Smith, Chief Economist at the Confederation of British Industry, said the Bank was clearly swayed by a series of softer economic data recently, and is waiting to see whether this marks the beginning of a more prolonged slow patch.

“But while it held fire this month, we cannot yet rule out further rate rises in the near to medium-term. The MPC’s view of the UK’s potential growth – which it believes to have shifted down – is unchanged, meaning even modest economic growth is likely to stoke inflation. Indeed, the recent firming in wage growth may be an early sign of domestic inflationary pressures picking up.

“Analysts and financial markets will be watching the MPC closely for any more signals around the timing and pace of future rate rises. Clear communication from the Bank of England will be important to help businesses and households plan for the future, and minimise uncertainty about changes in monetary policy.”

David Lamb, head of dealing at FEXCO Corporate Payments, said “Though two of the Bank of England’s ratesetting grandees voted for an immediate rate rise, and despite the Governor’s breezy press conference, it’s clear the doves remain firmly in charge on Threadneedle Street.

“With inflation falling fast, and the Bank predicting it could soon be falling faster, the inflationary imperative for a rate rise has all but gone. Given the increasingly parlous state of Britain’s economy, the Bank’s tacit mandate will now trump its overt one. ‘Thou shalt not imperil economic growth’ suddenly seems much more important than worrying about reining in inflation.”

If there is one crumb of comfort for the embattled GBP, it is that it is now trading in such a tight range that its fall from a weekly high on 10 May to a weekly low intraday was quickly corrected. GBP is suffering for now, and the steady barrage of weak UK data is only likely to move it one way – down.

Disclosure:

I have no positions in any of the securities referenced in the contribution

I do not use any non-public, material information in this contribution

To the best of my knowledge, the views expressed in this contribution comply with UK law

I agree with the terms and conditions of ReachX

This contribution is for informational purpose and does not constitute investment advice nor is it an offer to sell or buy, nor is it a recommendation for any security.

Gaurav Sharma Editor ReachX

 

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