‘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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Author Tom Eckett 
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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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