LONDON — New data from the Office of National Statistics on Friday, which showed UK GDP growth slowing to just 0.3% in the first quarter of 2017, has effectively killed off any chance that the Bank of England will raise interest rates in the foreseeable future, according to Barclays’ UK economics team.
The bank currently maintains a neutral stance on rates — meaning it has no bias toward cutting or hiking — having done so since late last year, around three months after cutting interest rates from 0.5% to 0.25%, and boosted its QE programme in August 2016, as a means to protect the UK from the coming economic shock of Brexit.
However, in recent statements, the BOE has made hints that a rate hike back to 0.5% — where the base rate stood for close to seven years post-financial crisis — could be on the horizon.
That is because, broadly speaking, the economy has outperformed expectations since the Brexit referendum, while inflation has surged. In its assessments of what its base interest rate should be, the bank has to assess a trade-off between rising inflation and the UK’s broader economic performance.
The bank’s government mandated inflation target is 2%, a mark it has comfortably exceeded in recent months, with expectations from most parts of the market that it will continue to rise this year as the fall in the pound since the referendum continues to hit. Inflation could pass over 3% by the end of 2017, according to numerous forecasts.
Had the economy kept performing as it did in the second half of 2016, the bank may have reached the limits of its tolerance of inflation going above target, noting in the minutes of its March Monetary Policy Committee meeting: “Some members noted that it would take relatively little further upside news on the prospects for activity or inflation for them to consider that a more immediate reduction in policy support might be warranted.”
However, with growth dropping, the MPC members thinking that way will likely be forced to reconsider, Andrzej Szczepaniak of Barclays wrote on Friday morning. Here’s the key extract:
“The UK has only now begun to feel the beginning of the post-referendum slowdown.
“Given the ascent of headline CPI (which we expect to peak at 3.1% y/y in June and August), the increasing likelihood of negative real wage growth in the coming months, the likely tightening of unsecured consumer credit over the coming quarters (which has of late supported resilience in household consumption), as well as the lowest savings ratio since records began, we expect that UK GDP growth will continue to decelerate over the course of 2017 as households are forced to tighten their belts.”
“All in all, we believe this strengthens our view that the Bank of England MPC will leave its monetary policy stance unchanged over our forecast horizon (until end 2018).”
Szczepaniak’s view is one also held by Samuel Tombs of Pantheon Macroeconomics, who wrote in an emailed note soon after the release:
“The MPC expected Q1 GDP to rise by 0.6% last month when “some members” warned that they were close to joining Kristin Forbes in voting to raise interest rates immediately. The soft preliminary estimate of GDP, therefore, should be enough to counter any concerns they have about inflation, which recently has exceeded their expectations.”
Last week, after parliament voted for a general election to be held in June, economists from Morgan Stanley had argued that the election
could lead the Bank of England to start a tightening cycle sooner than may have been expected, should the near guaranteed Conservative government after the election decide to take a more fiscally expansionary stance.
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