Bank of England seen keeping rates steady after data disappointment

By David Milliken

LONDON (Reuters) – Bank of England interest rates looks set to stay on hold on Thursday, after unexpectedly weak economic data and cautious remarks from Governor Mark Carney dashed the chances of what until a few weeks ago looked like a near-certain increase.

Now investors want to see if Carney tries to keep market expectations of an August rate hike alive when he gives a news conference shortly after the 1100 GMT (7.00 a.m. ET) rate announcement, or if he decides that hedging his bets is a safer strategy.

“The UK economy seems rather fickle at present (and) even the Bank of England seems to be blowing hot and cold,” said Hetal Mehta, an economist at Legal & General Investment Management.

Since he joined the BoE in 2013, Carney has signaled several times that the time was nearing for rates to rise from the historic low of 0.5 percent reached during the 2008-09 financial crisis, only for economic data to go the wrong way.

Sterling fell to a four-month low against the U.S. dollar on Tuesday, as markets priced diverging prospects for growth and interest rates on the two sides of the Atlantic.

Heavy snow slowed economic growth in much of Europe in March. But growth was weakest in Britain, where – less than a year before Britain is due to leave the European Union – Brexit-related pressures have squeezed consumer spending power and hurt firms’ willingness to sign off on major investments.

Moreover, subsequent surveys of business and consumer activity showed little rebound in April – adding support to the view of Britain’s statistics agency that the slowdown in first-quarter growth to 0.1 percent was largely unrelated to the weather.

RATE VIEW REVERSAL

Rates had looked like they were heading the other way. The BoE raised rates for the first time in more than a decade in November, reversing an emergency rate cut made after June 2016’s Brexit vote.

In February Carney said rates might need to rise somewhat faster than markets had expected, given the country’s long-term productivity problems, then the following month two of the BoE’s nine Monetary Policy Committee (MPC) members voted for an increase to 0.75 percent.

But late last month, data started to raise doubts. Inflation fell faster than the BoE had expected and the economy grew at its slowest annual rate in five years in early 2018.

Carney said data looked “mixed” and hinted at MPC disagreements.

Only a handful of analysts now think the central bank will ignore the recently weak growth and take a longer-term view that focuses on potential inflation pressures from unemployment at its lowest since 1975 and some signs of wage growth inching up.

Most economists polled by Reuters expect the BoE to vote 7-2 to keep rates on hold this month and not raise rates until August. Financial markets price in a roughly 65 percent chance of a rate rise by then, according to interest rate futures .

However, the BoE may not be comfortable with this scaling-back of interest rate expectations, which has the potential to fuel inflation through a weaker pound and cheaper credit.

Economists think it will trim its comparatively high growth and inflation forecasts for this year, but still forecast inflation above its two percent target over the medium term and economic growth of around 0.4 percent a quarter.

“We expect the disappointing first quarter to be portrayed as a temporary lull by the MPC … and therefore expect the lack of a hike to be presented as an expected postponement rather than a cancellation,” UBS interest rate strategist John Wraith said. But with growth slowing, the central bank could struggle to raise rates at all this year, he added.

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