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Interest rates to remain at 0.5% amid growing dilemma for Bank

The Bank of England is expected to keep interest rates on hold next week, but faces a growing dilemma over when to hike next amid mixed economic data and rising inflation fears.

Members of the Monetary Policy Committee (MPC) are expected to vote to keep rates at 0.5% on Thursday, having backed away from a rise last month after growth almost ground to a halt.

The Bank has already said it wants to wait and see “how the data unfolded” over the coming months before raising rates.

Economists had said this left the door firmly open for an August rise, when the Bank’s next set of quarterly forecasts are published.

But recent data showing that wage growth has stalled, as well as a mixed performance so far in the second quarter, combined with fears over resurgent inflation, have all left the Bank with a difficult decision.

Howard Archer, chief economic adviser at the EY Item Club, said: “It is currently touch and go as to whether the Bank of England raises interest rates in August or holds off until November.

“There will need to be sustained clear evidence that the UK economy has improved since the first quarter for the MPC to act.”

Official figures revealed the Consumer Prices Index remained at 2.4% in May, but it is thought inflation might edge up again over the summer as fuel costs rocket due to rising oil prices.

The Bank has previously said inflation would fall down to the 2% target this year as pressure from the Brexit-hit pound falls away.

But it has also said rates will likely need to rise to combat building domestic inflation, while fuel costs have added further upward pressure.

However, growth slowed to its weakest level for more than five years in the first quarter at 0.1%.

 And while the Bank believes this was largely down to the Beast from the East snow disruption, it is unclear if the economy has bounced back in the second quarter.

Official data for the construction, manufacturing and services sectors in April was mixed, while survey evidence from the purchasing managers for May has been lacklustre for all but services.

Wage growth – which is being watched closely by the Bank as a case for raising rates – has also appeared to ease back, with the last set of figures showing average earnings increased by 2.5% in the year to April, down by 0.1% on the previous month.

Mr Archer is predicting the Bank will now raise rates just once in 2018 to 0.75% – potentially in August or November – though he believes there will be two more in 2019 as it looks to bring rates in line with more normal levels after over 10 years at emergency lows.

Source: Shropshire Star

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Sterling slips back towards 2018 lows as dollar surges

Sterling fell on Wednesday back towards its weakest level of the year amid fresh worries about Britain’s Brexit negotiations, a new leg higher in the dollar’s rally and after relatively modest UK wage growth earlier in the week.

Sterling fell 0.2 percent to $1.3480, not far from the 2018 low reached on Tuesday of $1.3452. It had touched as low as $1.3456 on Wednesday.

A rally in the dollar and slashed expectations for British interest rate rises have caused what had been one of the best performing major currencies to give up all its 2018 gains.

“The pound has been unable to pull itself out of the doldrums following a month of weak data, a dovish Bank of England and growing concerns over the health of the labour market,” said Fiona Cincotta, a market analyst at City Index.

Versus the euro, the pound managed to gain 0.3 percent to 87.390 pence per euro as the single currency sold off across the board.

The British government said on Tuesday it would publish detailed plans for its future relationship with the European Union next month in an attempt to break the deadlock in Brexit negotiations.

Divisions within the government about what the relationship should look like, and repeated complaints from EU officials that Britain has not been clear on what it wants, has left investors convinced Brexit talks remain a real risk for the pound less than a year before Britain is due to leave the bloc.

“That illustrates once again: the clock is ticking loudly and rapidly, in less than a year a valid and realistic deal has to be reached. Things are not looking good on that front at present. And as a result nor are they for sterling,” Commerzbank analysts said in a note.

On Tuesday, UK data showed British employers hired many more workers than expected in early 2018, a tentative sign that the economy’s weak start to the year may be temporary.

However, wage growth data remained mixed, with annual growth in earnings, excluding bonuses, at 2.9 percent in the three months to March, as expected in the Reuters poll.

Source: UK Reuters

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Will the Bank of England raise rates in August?

With the Bank of England declining to raise interest rates in May, the question now is when will it take action?

Toward the start of the year, May had been tipped by market watchers and analysts as the month in which the Bank of England (BoE) would start hiking the base rate. However, those expectations started to disappear in April, with GDP growth figures disappointing and inflation dropping to come in closer to target.

But despite choosing not to raise rates this time, the BoE remains positive on the UK economy and expects to continue raising rates this year.

It attributes the first quarter of 2018’s slowdown in growth to adverse weather, expecting GDP growth to rise to 0.4 per cent in Q2, with year-on-year growth coming in at 1.75 per cent. Likewise, it forecasts inflation to come in at 2.4 per cent in Q2 and has lowered its forecast for inflation in two years’ time to 2 per cent, from 2.2 per cent.

With this in mind, the BoE is still committed to ‘ongoing tightening of monetary policy’ – just not starting in May.

So, if not now, when?

According to Dan Hanson of Bloomberg Economics, we should expect a rise in August, assuming growth rates start to improve. ‘If growth rebounds as we expect in Q2, the next increase in interest rates is likely to come in August,’ Hanson notes.

Pantheon Macroeconomics also believes an August rate rise is a strong possibility, albeit far from a certainty. ‘On balance, we still think the odds of an August rate hike slightly exceed 50 per cent,’ comments the economic research consultancy.

Another factor supporting a rate rise is the Bank’s desire to gain the space to cut rates again if it needs to, in the face of any unforeseen economic shocks. To regain this option, it will need to raise rates further, and the timeframe in which to do so is narrowing.

According to Pantheon Macroeconomics, ‘the window of opportunity for raising rates could disappear after August, as May will have to decide in Q4 whether to leave the EU’s customs union. Whatever decision she makes will anger one wing of the Tory party, potentially triggering a leadership challenge or a general election.’

Raising rates in such a political environment may not be possible. Therefore, the BoE may feel compelled to take action, raising rates before political instability surfaces.

A rise, however, is far from certain. Unexpectedly bad economic data could easily force the bank to delay rates. ‘It would not take much more sub-par activity data for the Monetary Policy Committee to wait a little longer.’ Pantheon Macroeconomics is therefore only ‘pencilling in an August hike.’

Source: Money Observer

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Banks push back Bank of England rate forecasts after growth data shock

Banks have pushed out their predictions for when the Bank of England will raise interest rates after data last week showed a sharp and unexpected slowdown in Britain’s economic growth.

Expectations the British central bank would raise borrowing costs in May had already weakened after Governor Mark Carney highlighted “mixed” economic data and noted there were also “other meetings” this year in an April 19 interview.

Economists now forecast the BoE will not act until August and may even wait until 2019. Before Friday’s GDP data most economists had expected the central bank to tighten monetary policy next month.

The changed expectations have hurt the pound, which has fallen sharply in value since the GDP release.

HSBC became the latest bank to erase its solitary rate hike call for 2018, saying on Monday that likely downward revisions to the BoE’s growth forecasts in May would make it harder to justify a rate hike.

“Our view of no rate rises beyond May remains intact: we’ve gone from ‘May and done’ to just ‘done’,” Simon Wells and Elizabeth Martins, analysts at the bank, wrote in a note.

The BoE raised interest rates for the first time in a decade last November, by 25 basis points to 0.5 percent.

Market expectations of a rate hike in May, as measured by swap markets, have fallen following the GDP data to less than 20 percent from around 50 percent. Friday’s figures showed Britain’s economy expanded by just 0.1 percent between January and March, the weakest quarter since 2012.

Earlier this month the market was pricing in as much as a 90 percent chance of a May rate rise.

The change in banks’ forecasts signals a much weaker outlook for the pound, which has been among the best performing major currencies in 2018. For the year, it is now up less than 2 percent against the dollar after having been up more than 6 percent two weeks ago.

Expectations of higher rates lifted sterling to its highest since the Brexit referendum in June 2016 at $1.4377 (1.05 pounds) on April 17 but it has tanked nearly 5 percent since then, to $1.3715 on Monday.

The likelihood that the BoE will not hike next month also means bond prices could rally further and presents a more volatile backdrop for the UK stock market.

UBS scrapped its estimate of a single rate rise in 2018 after the weaker-than-expected growth figures while Nomura, which has long been hawkish on UK interest rates, now sees a first hike in August.

John Wraith, a UBS economist, said inflation could fall back to the central bank’s target of 2 percent later this year and that concerns about talks between Britain and the European Union over the terms of their divorce could resurface.

FINELY BALANCED

Bank of America Merrill Lynch and Natwest Markets strategists pushed back their May rate hike calls to November.

“We view the (economic) slowdown as more serious, and see no prospect of hikes in 2018,” said UBS, the world’s largest wealth manager, in a note.

The market is now also forecasting no more than one 25 basis point rate hike over the remainder of 2018, from a near-certain two rate rises expected a fortnight ago.

But some analysts such as Sam Hill, a senior UK economist at RBC Europe still believes a rate hike is on the cards unless a raft of survey data this week tanks sharply.

“We are still holding on to a May hike call though we think it is a more finely balanced decision now than earlier as we believe,” RBC’s Hill said.

Source: UK Reuters

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Bank of England reveals split opinion on interest rates

Bank of England rate setters have sent mixed signals over whether to hike interest rates next month, pointing to the prospect of a split vote.

Michael Saunders, a member of the Bank’s nine member Monetary Policy Committee, brushed aside recent weak economic data, saying that the significance of the slowdown is “questionable”.

Economic activity in March was hit by unusually heavy snow

Michael Saunders, MPC member

He added: “Economic activity in March, and especially retail sales, was hit by unusually heavy snow.

“Previous experience suggests that such snow effects typically reverse in the next month or two.”

This, Mr Saunders added, means that the Bank’s “foot no longer needs to be so firmly on the accelerator”.

“Any further tightening is likely to be at a gradual pace and to a limited extent. A key point is that ‘gradual’ need not mean ‘glacial’,” he said.

Mr Saunders was one of two members of the MPC to vote for a hike in rates in March, from 0.5% to 0.75%, in order to curb growing inflation triggered by the collapse in the Brexit hit pound.

But inflation fell back to 2.5% from 2.7% in March, a one year low, easing pressure on the Bank to act.

Mr Saunders’ comments come in stark contrast to Bank governor Mark Carney, who cautioned markets on Thursday that a rate rise in May is not a certainty.

Currency traders, who had send the pound soaring in the belief that a May hike was a certainty, were caught on the back foot.

The pound tumbled following Mr Carney’s comments, falling from 1.42 US dollars to 1.40.

Connor Campbell, financial analyst at SpreadEx, said: “There was a slight improvement from sterling as Friday went on, thanks to a hawkish rebuke to Carney’s Thursday dovishness from MPC member Michael Saunders.”

“However, the pound-boosting potential of these comments was tempered by the fact that a) this wasn’t some dove-to-hawk switch given Saunders’ stance last month, and b) he doesn’t feel that ‘the exact timing of rate changes must be totally predictable or signalled in advance’.”

The Bank of England will reveal on May 10 whether or not the MPC has decided to raise rates.

Source: BT.com

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UK House Price Inflation Eases For Second Month

Inflation in Britain unexpectedly fell in March, official figures showed Wednesday, suggesting that the Brexit vote’s boost to prices is running its course and raising questions in financial markets as to whether the Bank of England will raise interest rates again this month.

The consumer price index in March was up 2.5% compared to the same month a year ago, the Office for National Statistics revealed on Wednesday, down from 2.7% the month before, where it was expected to stay, and the third fall since hitting a peak of 3.1% last November.

Philip Smeaton, chief investment officer at Sanlam UK, adds: “With inflation falling back towards the 2% target and wage growth overtaking inflation for the first time in more than a year, it finally looks like the squeeze on living is easing”. “This rate hike does not signal the onset of a conventional tightening cycle”.

On a monthly basis, house prices edged down 0.1 percent in February. Alcohol and tobacco taxes also didn’t increase as usual after the government changed the timing of its annual budget announcement to the autumn.

At the pumps, motorists also faced lower costs, with petrol down by 1.6p per litre on the month to 119.2p per litre and diesel falling by 1.5p to 122.9p.

Samuel Tombs, chief United Kingdom economist at Pantheon Macroeconomics, says YES. Inflation looks to be falling back as predicted, but with wages picking up and unemployment still falling, it’s possible this tightness in the labour market could eventually push inflation back up.

Given yesterday’s wage growth data, coupled with today’s inflation rate figures, it means the Bank of England is less likely to raise interest rates next month.

Both sterling and United Kingdom gilt yields have initially moved down sharply in response to the data, which are seen as weakening the case for further interest rate rises from the Bank of England (BoE).

The pound tumbled after the data, sliding 0.5% to $1.4217.

Core CPI, which excludes more volatile prices such as for fuel and food, eased down to 2.3% from 2.4%, with the market having expected a slight pick-up to 2.5%. Services inflation was just 2.5 per cent in March, and on its current trend it won’t reach its 3.5 per cent pre-recession norm, required for at-target headline inflation, for another three years.

Source: Click Lancashire

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Bank of England to raise rates in May, almost all economists say

The Bank of England will raise its key interest rate to 0.75 percent in May, nearly all the 76 economists polled by Reuters said, then add another 25 basis points just before Britain is due to leave the European Union early next year.

Soon after the June 2016 vote to split from the EU, the Bank cut 25 basis points from borrowing costs, taking them to a record low of 0.25 percent. It reversed this move in November, a decision most economists said at the time was a policy error.

Following hawkish signals from policymakers and relatively upbeat data, all but seven of the 76 economists polled April 10-17 said Bank Rate would go up from 0.5 percent on May 10 when the Bank is also due to publish its quarterly Inflation Report.

A majority of economists, 37 of 62, said the BoE will have lifted Bank Rate to 1.0 percent or higher by the end of the first quarter next year. The median forecast shows the rate at a still historically low 1.25 percent in the final months of 2019.

Growth has continued since the referendum, and while Britain has fallen from the top to the bottom of the fastest-growing economies among its peers, the poll forecast only a median 10 percent chance of a recession this year.

Unemployment fell to its lowest since 1975 in the three months to February, official data showed on Tuesday, although wage growth in the period was not as strong as expected.

But the BoE has said falling unemployment should start to push up pay more quickly, the main reason it gave for being likely to raise interest rates faster than it had previously thought.

“February’s labour market figures provide us with optimism that sustained rises in real wages are now in prospect and should seal the deal on another interest rate hike in May,” said Ruth Gregory at Capital Economics.

STERLING SUPPORT

Progress has been made on a transition period after Britain is due to leave the EU by the end of March 2019, where much of its relationship will remain the same. But a lot remains to be discussed about future trading arrangements.

Economists gave a relatively low 20 percent chance of a disorderly Brexit, in which no deal is agreed by the end of March 2019. That probability has been the same all year.

“Following the agreement on the transitional arrangements reached at the March EU Summit, we view the risk of a ‘disorderly’ Brexit as having lessened further,” said Victoria Clarke at Investec.

In the aftermath of the EU referendum vote to leave, sterling GBP= slumped, making imports more expensive and causing prices to rise faster than the 2 percent annual rate the Bank targets.

But the pound soared to its highest level since then on Tuesday, reflecting weakness in the U.S. dollar, but also because of seasonal dividend payments to British shareholders from foreign companies.

So inflation is expected to ease and average 2.5 percent this year and then fall to 2.1 percent in the following two years, unchanged from last month’s poll. Wage rises are expected to outpace inflation this year and next.

Growth forecasts were also unchanged, with expectations for 1.5 percent in 2018 and 2019, little different from IMF forecasts published on Tuesday. After a sluggish 0.3 percent growth expected in the first quarter of the year, medians showed 0.4 percent through the end of next year.

Euro zone growth was predicted at 0.4 to 0.6 percent per quarter over the same period, but economists in a sister poll cautioned growth would take a further hit from the trade disputes between the United States and China. [ECILT/EU]

Over 90 percent of 31 respondents said the dispute would also damage UK growth, including two who expected the impact to be significant, but many said Brexit negotiations would hold more sway. Only two said Britain would benefit.

“Really very much contingent on what is actually implemented in the U.S./China dispute … Brexit-related trade issues are far more material in impact terms to the UK economic outlook,” said Marc Ostwald at ADM ISI.

Source: UK Reuters

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Soft property market could block Bank of England interest rate rise

The faltering property market could make it more difficult for the Bank of England to raise interest rates next month, according to the Royal Institution of Chartered Surveyors (RICS).

Buyer demand slipped again in March to mark a year of falls, surveyors reported in a gloomy snapshot of the market.

The amount of homes being put up for sale has also dropped, with average stock levels on estate agent books close to all-time lows, RICS said.

And new sales instructions have declined for the seventh consecutive month, with 20% more of surveyors reporting a fall than a rise.

House prices remain flat, with London and the South East the worst performers, while Northern Ireland, Wales and the East Midlands were the strongest.

There has been growing expectations the Bank of England will next month raise interest rates to 0.75%, after a number of hints from the Monetary Policy Committee (MPC).

However, the lacklustre property market could throw a hike off course.

Simon Rubinson, RICS chief economist, said: “The latest RICS results provide little encouragement that the drop in housing market activity is likely to be reversed anytime soon.

“Apart from the implications this has for the market itself, it also has the potential to impact the wider economy contributing to a softer trend in household spending.

“This could make Bank of England deliberations around a May hike in interest rates, which is pretty much odds-on at the moment, a little more finely balanced than would otherwise be the case.”

Outlook brighter

The outlook for the market is more positive, with more surveyors expecting an increase in sales than a further fall.

Brian Murphy, head of lending for the Mortgage Advice Bureau, said: “It’s interesting to note that 17% more of respondents believe we’ll see a pick up in sales activity in twelve months’ time, which will be after our scheduled departure date from Europe, which appears to reflect sentiment that a lot of would-be movers are holding on until after Brexit before making any major decisions.

“Whether or not at this point we’ll see demand, activity and values return to previous levels in the currently stalling London and South East markets, however, remains to be seen.”

Source: Your Money

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Many Bank of England officials favour more clarity on rates – FT

Many of the Bank of England’s top policymakers privately favour a more direct approach to signalling how they expect to change interest rates, the Financial Times reported on Thursday.

Members of the BoE’s Monetary Policy Committee are debating whether to be more forthcoming about their rate plans, although some worry that more transparency would lead the public to see statements as commitments rather than projections, the FT said.

Other central banks, including the U.S. Federal Reserve, regularly publish detailed forecasts for how rates might change.

A BoE spokesman declined to comment on the report.

Currently the BoE publishes forecasts for growth, inflation and many other economic indicators. It sometimes encourages investors to look at whether it thinks market interest rate expectations will lead to inflation overshoots or undershoots.

MPC member Gertjan Vlieghe said in March that rates would probably need to rise once or twice a year over the next few years, adding to signals from other top BoE officials since November about the likelihood of rate hikes ahead.

BoE Governor Mark Carney introduced a policy of giving clearer steers on the future path for rates when he joined the British central bank in 2013. But several of those signals were knocked off course by unexpected changes in the economy.

Carney said in February that he did not give guidance on a specific path for rates except in exceptional circumstances.

The BoE is expected to raise rates in May for only the second time since the start of the global financial crisis more than a decade ago.

Source: UK Reuters

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2 reasons why the market is fundamentally misjudging the Bank of England’s next step

  • The Bank of England hinted that it is set to hike interest rates in May, but there are signs it could change its mind.
  • A rate hike in May is, in the words of bond market guru Mohamed El-Erian “far from a done deal.”
  • The wording of the committee’s statement is far less explicit than that in the Bank of England’s statement in September last year, the meeting prior to its November rate hike.
  • This suggests some reticence to hike on the bank’s part.
  • The make up of the vote of bank’s Monetary Policy Committee also raises concerns.

LONDON — As expected, the Bank of England left interest rates on hold on Thursday, but signalled — in the eyes of most commentators and many in the markets — that a rate hike at the next meeting of its MPC is all but guaranteed.

After hiking rates for the first time since the financial crisis last November, the bank spent much of the rest of the year signalling that it will likely raise rates further in 2018.

Most had expected hikes towards the end of the year, but an unusually upbeat MPC statement in February brought that horizon forward to May.

March’s statement seems to confirm that, with two MPC members voting for an immediate hike, and the bank as a whole saying that “an ongoing tightening of monetary policy over the forecast period will be appropriate” going forward.

However, there are some signs that a move upwards from the current rate of 0.5% to 0.75% in May is, in the words of bond market guru Mohamed El-Erian “far from a done deal.”

“Ignore the split rate vote; the real news is that the Committee has chosen not to signal an imminent rate rise as clearly as it did last year,” Samuel Tombs, chief UK economist at research house Pantheon Macroeconomics said in an email to clients shortly after the decision.

The wording of the committee’s statement, Tombs says, is far less explicit than that in the Bank of England’s statement in September last year, the meeting prior to its November rate hike.

“Back in September—the meeting before it hiked rates in November—the Committee said it would hike ‘over the coming months’. Today, the Committee has not given any time-bound guidance,” Tombs writes.

The main reason for that change of wording, Pantheon’s note argues, is that recent economic data, while fairly solid, has not been as strong as the BoE had expected when it struck its hawkish tone back in February.

“The Committee’s confidence has been knocked by a “few surprises in recent economic data”, which we assume means the below-consensus PMIs, soft retail sales figures and February’s 2.7% CPI inflation rate, which was below the Committee’s 2.9% forecast,” Tombs says.

That leads him to the conclusion that a “rate increase in May still is under active consideration, but the likelihood is nowhere near as high as the 80% chance priced-in by markets before this meeting.”

As a result, Tombs forecasts that “activity and inflation data” will “surprise the Committee to the downside, ensuring that it waits until August to raise interest rates again.”

Two dissenters

Another reason to suspect that the bank may not hike in May as expected is the makeup of Thursday’s decision. The two members of the committee who dissented were Ian McCafferty and Michael Saunders, both widely known as the bank’s most hawkish policymakers.

Saunders and McCafferty tend to move in tandem, and the last time the pair of them dissented to the upside was in June 2017, five months and three meetings before the rest of the MPC came on side. Since last year the bank has changed its meeting schedule, moving to just eight per year.

The bank generally only changes policy on the day of an Inflation Report, as Governor Mark Carney holds a press conference on those days, giving the bank a greater ability to communicate its reasoning behind decisions to the markets and wider public.

With that borne in mind, should the MPC follow the pattern of waiting a quarter of its annual meetings to follow McCafferty and Saunders, it could be August — the first Inflation Report after May — before the BoE hikes, matching the forecast of Pantheon Macroeconomics.

To be sure, this is not a scientific way of working out when the bank will hike, but it might just turn out to be true.

Source: Business Insider