Is Carney an unreliable boyfriend – or just sensitive?

It all seemed a lot clearer in February. At the publication of its economic health check three months ago, the Bank gave a clear signal that interest rates would rise rather more quickly than expected.

Global growth was strong and the UK economy was caught in its positive tailwind.

Real incomes were starting to rise and inflation was still stubbornly above the 2% target.

Commentators started talking confidently of a rate rise this month and another one in the autumn.

The markets were so bullish they priced in a 90% probability of a hike before today was out. All such talk has withered.

Interest rates will remain at 0.5%.

Bounce back

Today the Bank struck a much more doveish note on the future path of interest rate rises – a doveish note first revealed by Mark Carney, the Governor, in his BBC interview last month.

The judgement has to be now that the next interest rate increase – unless there is a strong bounce back in the economy or inflation starts rising substantially again – will be far later this year.

The why is clear.

The economy took a major pounding in the first three months of 2018, with growth falling to 0.1% – well below the Bank’s own February forecast of 0.4%.

Although the Bank says that growth for the rest of the year will be stronger, that first quarter figure has led to a significant downgrade in the overall economic forecast for 2018.

Some of that is down to the poor weather, with the Bank being more aggressive about the negative effects of the Beast from the East (“a significant driver of reduced activity”) than the Office for National Statistics.

Then there are the “exceptional circumstances” of Brexit – which the Bank says it has to keep constantly in mind.

Global growth has also eased slightly and there is some evidence of declining consumer confidence alongside a softer housing market.

All in all, the Bank has become more cautious about the performance of the economy.

Consumer confidence

Yes, employment levels remain strong.

Incomes are rising slightly faster than inflation.

And the Bank does expect growth to bounce back over the rest of the year – alongside inflation falling more rapidly than expected over the next two years.

But there are just too many erratic’s for the Monetary Policy Committee to feel confident that now is the time to raise rates.

How will the increase in oil prices following America’s decision to pull out of the Iranian nuclear agreement affect inflation?

Will that miserable Q1 growth figure be revised upwards, as Q1 figures have been in the past, particularly those affected by the weather?

Will consumer confidence return?

Will there be a major Brexit break-through?

The critics might gather.

Wait and see

Is Mr Carney revealing once again his “unreliable boyfriend” tendencies, promising that interest rate rises are just around the corner, only to pull back?

He might suggest that he and the other eight members of the MPC are less the unreliable partners, more the “sensitive” listeners.

Sensitive to changes in the data which effect a decision based on fine margins and delicate judgements.

It was John Maynard Keynes who said that when the facts changed, so, sir, did he.

Today the Bank has changed tone.

Let’s wait and see, it is saying.

Let’s wait and see how the economy develops until we give any firm guidance on the path of interest rates beyond the Bank’s often used formulation of some limited rises “over the forecast period” of the next three years.

Yes, they will rise at some point.

But the chances of that happening sooner rather than later has receded.


 

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Author Kamal Ahmed 
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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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Author’s David Milliken, Andy Bruce

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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.

 


 

Here at Dollar Destruction, we endeavour to bring to you the latest, most important news from around the globe. We scan the web looking for the most valuable content and dish it right up for you! The content of this article was provided by the source referenced. Dollar Destruction does not endorse and is not responsible for or liable for any content, accuracy, quality, advertising, products or other materials on this page. As always, we encourage you to perform your own research!

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Author Tom Finn

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