An interest rate hike in May is now “all but nailed on”, after the Bank of England kept rates at 0.5% on Thursday but hinted that they will be on the move in two months’ time. While it was the expected outcome, some have bemoaned the decision not to raise today as “a missed opportunity”.
The Bank’s Monetary Policy Committee voted 7-2 to hold rates. The outcome was unsurprising, but the two dissenting voices were not expected. Ian McCafferty and Michael Saunders raised worries that inaction now will mean rates will have to rise faster and further in future, but they were over-ruled.
The Bank’s minutes said holding off would “enable the Committee to undertake a fuller assessment of the underlying momentum in the economy, the degree of slack remaining and the extent of domestic inflationary pressures”.
Jacob Deppe, head of trading at online trading platform Infinox, points out that the Bank would have first-quarter GDP figures and two more months of inflation data at hand in May, meaning it “will have a better sense of how fast wages are growing”.
Ben Edwards, manager of the Morningstar Bronze Rated BlackRock UK Corporate Bond Fund, says the May hike is now pretty much guaranteed. But he thinks this will be the planned summer hike brought forward, rather than an additional rise.
Sterling Strengthens Further
Sterling jumped on the news, hitting a seven-week high against the US dollar and continuing its upwards trend. This means inflation is likely to fall towards the Bank’s target of 2% through the course of the year, as the pound’s previous depreciation filters out of the calculation.
The FTSE 100, which moves inversely to the currency, prolonged its downward spiral, which has seen it now slip below 7,000 for the first time since December. The blue-chip index is now almost 11% below its January high of 7,779.
While it was as expected, some have branded it a missed opportunity, with Mark Carney previously having cautioned that rates would have to rise “faster and sooner”. “The question we’d ask is why the Bank thought it necessary to wait until May,” says Craig Inches, head of rates and cash at Royal London.
Given the higher level of sterling, the rise in short-dated Gilt yields and slew of positive data, he explains, “the economy is clearly ready for a rate hike in May – but it would have been just as ready today”.
But Ben Brettell, senior economist at Hargreaves Lansdown, admits the Bank “faces a delicate balancing act”. Any pick up in wage growth could erode slack in the labour market, which could in turn push inflation higher in the future. “Throw in a hefty dose of Brexit-related uncertainty and it’s easy to see why the committee is divided at present.”
Upside Surprise for Retail Sales
Some positive news elsewhere came in the form of better-than-expected retail sales. After two months of falling numbers, sales bounced back to growth, rising 0.8% comparedw ith an expected 0.4%.
Still, the figure wasn’t strong enough to swing the previous quarter into positive territory, with sales declining 0.4% in the past three months. And Brettell cautioned about getting too excited.
He notes that the monthly numbers do tend to be volatile, and that the underlying trend is still one of weakness. Further, March’s figure is likely to have been negatively impacted by severe weather conditions.
That said, he admits the UK consumer has been “surprisingly resilient in the face of economic uncertainty”. With inflation likely to fall back and wage growth set to improve, “there could be some light at the end of the tunnel” for squeezed households. “This could bode well for the retail sector,” he adds.
