The Bank of Englands long-running “will they, wont they” saga took an interesting and somewhat unexpected turn last week.
With markets pencilling in an 84 per cent likelihood of a UK interest rate hike in May, the Banks Governor Mark Carney decided to throw a spanner in the works by suggesting that rates may not rise in May after all.
As usual the Bank Governor – whom wags have dubbed the unreliable boyfriend – gave himself plenty of wriggle room. He insisted an interest rate rise was still likely this year. Note however the subtle change in tone – an interest rate rise, singular.
So what we have learned is that there will be – probably – one interest rate rise this year but that its unlikely there will be more. Some had been of the view there would be an interest rate hike in May followed by another in the Autumn. That has, it seems, officially been taken off the table.
Moreover, we can no longer be sure of the timing of the next interest rate rise at all.
May rate hike called off
Markets have reacted predictably. The Pound promptly fell from $1.424 to $1.40. Meanwhile, market expectations for a May rate hike fell off a cliff. Where on Thursday markets forecast an 84 per cent probability of a rate hike next month, by Friday that had fallen to 54 per cent. Equally, market expectations of a rate hike in June fell from a 79 per cent probability to a 58 per cent probability.
Why this sudden change? Well, economic growth in the first quarter is expected to have been no higher than 0.2 per cent but that was, until Mr Carneys intervention, being blamed on the weather.
There will now be much reviewing of economic growth forecasts, given the Governors suggestion that some of the economic data had been softer than anticipated, particularly the retail sales data.
There is also the fact that inflation fell faster than anticipated in March, to 2.5 per cent, suggesting the Bank doesnt need to take immediate action but can instead wait until wage rises feed through into the inflation picture, which may not be until the Autumn.
And then theres Brexit. Isnt there always? Mr Carney said on Thursday: "Most recently it has been the uncertainty around Brexit that has prevented what would otherwise have been a surge in investment in this economy akin to the big pick–ups in business investment we have seen in other economies.”
In other words, the UK economy could, and should, be doing significantly better than it currently is. Under such circumstances business investment, wages and inflation would all be rising, and the Bank would have the room to raise interest rates which it currently lacks.
Once again, Brexit is holding Britain back, is none-too-coded message from the Bank Governor. Until or unless there is a more certain environment, which is a long way from being achieved, this will remain the case.
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