‘Any other decision would be a major surprise to markets’: Chances of a May rate hike falls to just 8%

Drop of 90 percentage points in one month

The market expectations of an interest rate rise in May has fallen 90 percentage points in one month following weaker-than-expected GDP data, lower inflation and Bank of England governor Mark Carney’s comments that it was not a “done deal”.

Carney’s comments that it was not a “done deal”.

At its February meeting, the Monetary Policy Committee suggested a rate rise would be needed “somewhat earlier” and to a “somewhat greater extent” than anticipated in order to bring inflation back to its 2% target, causing market expectations of a May rate rise to jump 17 percentage points to 67%.

More clarity was subsequently provided with regard to Brexit in March, a key issue for the MPC, with Michel Barnier and David Davis announcing both parties had agreed a large part of the transition deal when the UK leaves the bloc on 29 March 2019. These factors led markets to price in a 98% chance of a rate rise.

However, a string of bad data has led this to drop to just 8% with UK inflation falling to 2.5% in March, its lowest level in 12 months while the economy grew just 0.1% in Q1, the slowest rate since Q4 2012 and missing analysts’ expectations of 0.3% growth.

Furthermore, in an interview with the BBC on 20 April, Mark Carney attempted to quell market expectations of a May hike arguing there was still a lot of data to consider.

He said: “We have had some mixed data. On the softer side some of the business surveys have come off. Retail sales have been a bit softer – we are all aware of the squeeze that is going on in the high street.

“We will sit down calmly and look at it all in the round. I am sure there will be some differences of view but it is a view we will take in early May, conscious that there are other meetings over the course of this year.”

Commenting on the chances of a rate rise, Neil Birrell, CIO at Premier Asset Management, said: “We have moved very rapidly from the chances of an increase in interest rates in the UK being odds on to strongly odds against.

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“Two of the main drivers for any increase have both fallen away; inflation has fallen faster and further than expected and the GDP growth numbers have also been disappointing.
“If the ongoing uncertainty around Brexit is added in then the MPC is likely to err on the side of caution and keep the rate at the current level.

Birrell added that any other decision would now be “a major surprise to markets”, particularly sterling, which has weakened sharply and “may stay under pressure in the short term”.

“The balancing factor to the debate is that real wage growth is now in a healthier state, but not strong enough to tip the balance this month. The focus will be on any comments from the committee on the economic outlook and future path for rates.”

Ongoing uncertainty around Brexit is added in then the MPC is likely to err on the side of caution and keep the rate at the current level.

Sarah Coles, personal finance analyst at Hargreaves Lansdown, added: “Back in early April, a rate rise at the May meeting was so widely predicted that it seemed nailed on. However, over the past few weeks, the picture has changed dramatically.

“Of course, a rate rise remains a possibility, but this is yet another ample demonstration of the futility of trying to guess the date of the next interest rate rise, and how dangerous it is to base your savings strategy on unreliable predictions.”


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UK growth falls to five-year low, Bank of England seen delaying rate hike

LONDON

Britain’s economy suffered its weakest growth since 2012 in early 2018, with heavy snow only partly to blame, prompting investors to slash their bets on a Bank of England rate rise next month.

Britain’s economy grew by just 0.1 percent in the first quarter of 2018, well below the BoE’s prediction of 0.3 percent and at the bottom end of economists’ forecasts in a Reuters poll, official data showed on Friday.

Sterling tumbled by more than a cent against the U.S. dollar GBP=D3, and interest rate futures more than halved the chance of a May rate rise to less than 20 percent BOEWATCH.

“A very weak Q1 GDP print has ended the chances of a rate hike in May. For us, it means no hike at all in 2018,” John Wraith, a market strategist at UBS, said.

In year-on-year terms, growth slowed to 1.2 percent from 1.4 percent, its weakest since the second quarter of 2012 and a rate likely to keep Britain lagging behind its international peers.

A spokesman for Prime Minister Theresa May said the numbers were “clearly disappointing”, but played down suggestions that uncertainty over Brexit was to blame.

The slowdown from already modest quarterly growth of 0.4 percent in the fourth quarter of 2017 was driven by a sharp fall in construction output.

Unusually heavy snow storms in late February and early March, dubbed “the Beast from the East”, were known to have hurt some businesses before Friday’s data. But the Office for National Statistics said the problems went beyond that.

“While the snow had some impact, particularly in construction and some areas of retail, its overall effect was limited with the bad weather actually boosting energy supply and online sales,” ONS statistician Rob Kent-Smith said.

Consumer-facing businesses also slowed in the first quarter, the ONS said, probably reflecting higher inflation.

The pound’s fall after the June 2016 Brexit vote eroded households’ disposable income throughout last year.

The pound’s fall after the June 2016 Brexit vote eroded households’ disposable income throughout last year.

The scale of the slowdown may unsettle the BoE’s Monetary Policy Committee (MPC), which next week begins considering whether to raise rates on May 10 for only the second time since the 2008 financial crisis.

However, some BoE policymakers have said early estimates of first-quarter GDP are often revised up – on average, by 0.3 percentage points – particularly at times of harsh weather.

“If the MPC wants to look through this number and hike they can justify it – they just have a challenge selling it to the man and woman on the street,” Scotiabank economist Alan Clarke said.

A key factor will be whether April purchasing managers’ surveys next week rebound from weak March readings. If they are similar to data this week from the Confederation of British Industry, the recovery may be limited.

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RATE HIKE ODDS LENGTHENING

Until recently, most economists were predicting that the BoE would not be swayed by weak first-quarter data because inflation is running above its target and the unemployment rate is the lowest since 1975.

Two of the BoE’s nine policymakers voted to raise rates to 0.75 percent in March, saying the economy was running at close to full capacity – a view largely shared by their colleagues.

But many economists had begun to think the BoE might be getting cold feet about a May rate rise after Governor Mark Carney alluded to “mixed” data last week and the possibility of moving rates at a later meeting.

Markets now price in just one rate rise for 2018, probably by August and almost certainly by November.

UBS’s Wraith said he thought the economy would slow further, and that the BoE would be unable to raise rates later this year.

“Brexit-related anxiety is a headwind that is blowing more strongly as time goes by,” Wraith said.

In the final three months of 2017, Britain recorded the slowest year-on-year growth of any major advanced economy. For this year, the International Monetary Fund predicted last week that Britain would move ahead of Japan and Italy.

Britain’s preliminary GDP data – which only has 40 percent of the figures used to calculate the final estimate – precedes most other European numbers. But the French statistics agency has estimated French GDP growth fell to 0.3 percent during the first quarter from 0.7 percent in the quarter before.


 

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U.K. Balances Day-to-Day Budget for First Time Since 2002

  • Britain now borrowing only to finance capital investment
  • Total budget deficit in 2017-18 undershoots OBR forecast

Britain was in surplus on its day-to-day budget for the first full fiscal year since the early 2000s, a milestone that is almost certain to revive calls for an end to austerity.

Revenue exceeded spending by 112 million pounds ($156 million) in the 12 months through March, meaning Britain is now borrowing only to finance capital investment, figures from the Office for National Statistics showed Tuesday.

Including investment, the deficit narrowed to 42.6 billion pounds, the least in 11 years and below the 45.2 billion pounds predicted by budgetary officials last month. In March alone, the shortfall unexpectedly narrowed to 1.3 billion pounds, the lowest for the month since 2004.

 Almost a decade of austerity has seen the deficit fall from 9.9 percent of GDP in the aftermath of the financial crisis to 2.1 percent last year, but the cuts have left voters weary and taken a heavy toll on Prime Minister Theresa May’s Conservative government.
The squeeze has led to the loss of hundreds of thousands of local-authority jobs and left hospital emergency services struggling to cope with a spike in winter illnesses. In a sign that the government is yielding to public pressure, it announced last month it was lifting the cap on pay increases for nurses and other workers in the National Health Service.

The elimination of the current-budget deficit came a year earlier than the Office for Budget Responsibility predicted but two years later than George Osborne envisaged when he became chancellor in 2010 — before the European sovereign-debt crisis hit economies across the region.


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Debt Burden Falling

The surplus last year was the first since 2001-02, when Tony Blair was prime minister and the economy was growing healthily. Net debt fell for a third year to 76.3 percent of GDP, the lowest since 2011-12. Chancellor of the Exchequer Philip Hammond hailed the figures as further evidence of an economy “at a turning point.”

Revenue proved much stronger than forecast, growing 3.3 percent. Self-assessed tax receipts, which were expected to be hit by distortions to dividend payments, fell just 0.6 percent amid record levels of employment that boosted income tax.

On the spending side, tight control over departmental budgets was partly offset by higher debt costs — the result of faster inflation — and bigger transfers to European Union institutions. The increase was due to the EU demanding greater front loading of contributions for 2018 than they did in 2017.

Cautious Approach

The cash measure used to calculate how much the Treasury needs to borrow in the financial markets came in at 40.7 billion pounds in 2017-18, instead of the 40.3 billion pounds predicted by the OBR. The Debt Management Office announced after the data that it is increasing its gilt-issuance plans for the current fiscal year by 3.1 billion pounds.

In March, debt costs were 1 billion pounds lower than a year earlier at just 300 million pounds, as the recent slowdown in inflation cut the cost of servicing index-linked bonds.

Despite the improvement in the public finances, Hammond may be reluctant to loosen the purse string too much with Brexit uncertainty hanging over the economic outlook.

The OBR predicts Britain will still be borrowing 21 billion pounds by 2023, casting doubt over whether Hammond can balance the books by the middle of the next decade as promised.

 


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Sterling stuck at two-week low as investors cautious over May rate hike

LONDON

Sterling slipped to a two-week low against the dollar on Monday as investors questioned whether the Bank of England would raise interest rates in May following weaker-than-expected economic data and cautious comments from governor Mark Carney.

The pound has been one of the best performing major currencies in 2018 and last week surged to its highest level since the Brexit referendum in June 2016.

But weaker-than-expected wage growth and inflation, and comments by Carney that the data was “mixed” hit the currency hard, sending it down almost 1.7 percent for the week as investors rushed to price in the possibility the BoE could delay raising rates until later in the year.

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Analysts on Monday said they would watch gross domestic product figures due later in the week for signs of how the economy was holding up and whether it pointed to a BoE ready to hike rates.

“We think the UK data this week may be enough to rekindle rate hike expectations,” said ING FX analyst Viraj Patel.

But he cautioned that politics could impact sterling this week if a cross-party and non-binding technical vote on Brexit on Thursday threatened Prime Minister Theresa May’s leadership.

The pound traded flat at $1.3997, after earlier hitting a 2-1/2 week low of $1.3984, as broad dollar strength kept the pound under pressure.

Against the euro, the pound recovered and rose 0.3 percent to 87.515 pence.

A seasonal rise in capital inflows into Britain from foreign companies paying UK shareholders dividends has boosted sterling during April in recent years.

Economists, almost all of whom had predicted the BoE would act in May before Carney’s Thursday interview, believe the central bank’s vote on rates next month will now be very close.

Economists said that because of an acceleration in nominal wages and above-trend real GDP growth they expected four 25 basis point hikes over the next two years, with two increases each in 2018 and 2019.

 


 

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