Bank of England First-Quarter Slump Thesis Tested This Week

(Bloomberg) -- The Bank of England getting some crucial economic numbers to assess -- if it believes them.

Governor Mark Carney and other officials have disputed official figures showing a near stagnation at the start of the year. But that’s created tension with their pronouncements that investors should focus on the economic data to understand how the central bank will set monetary policy.

Bank of England First-Quarter Slump Thesis Tested This Week

After the BOE didn’t deliver on a once-expected interest-rate increase in May, the question now is when the next tightening comes. This week sees the release of inflation, wage and retail sales numbers, all of which have implications for consumer spending and the BOE’s analysis of when to take the next step on its rate-hike ladder. With manufacturing data Monday proving disappointing, the central bank may have to rethink.

DayData Forecast ActualPrior Month
MondayIndustrial Production (April)0.1%-0.8%0.1%
TuesdayWage Growth (Feb.-April)2.9%2.9%
Unemployment (Feb.-April)4.2%4.2%
WednesdayInflation (May)2.4%2.4%
ThursdayRetail Sales (May)0.5%1.6%

“A miserable and thoroughly worrying set of U.K. data,” Howard Archer, an economist at EY Item Club, said after the manufacturing numbers were released. He added that they will “fan concerns over the U.K. economy.”

The BOE’s benchmark is currently at 0.5 percent and the central bank says that a modest tightening will be needed in the coming years, without being specific on the timing.

In the first quarter, the economy grew just 0.1 percent, but the BOE expects that to be revised up and for this quarter to see a 0.4 percent expansion. Recent positive indicators pointing to stronger growth include the composite PMI, which rose in May, continuing its recovery from a 20-month low in March.

That may give officials hope that their view that the first quarter was a weather-related aberration is the right one. Rejecting ONS numbers, they’ve put more trust in the BOE’s own, private, models.

In a speech last week, policy maker Dave Ramsden said the early signs are that the U.K. economy is powering ahead this quarter and a period of “unusually subdued” wage growth is coming to an end. Still, the outlook for policy remains conditional on the data, he said. The final estimate for first-quarter GDP isn’t due until June 29, more than a week after the BOE’s policy meeting this month.

More clarity should be on the way. Economists say a report Tuesday will show wage growth remained at 2.9 percent in the three months through April, while data the next day will put inflation at 2.4 percent in May. Figures on retail sales will be published Thursday.

Yet the first release of the week presented a more challenging picture, with manufacturing output falling the most in 5 1/2 years in April and construction posting a smaller-than-expected gain. The pound declined 0.3 percent to $1.3371 as of 10:15 a.m. London time.

Further Reading:

Investors are currently pricing in an about 60 percent chance of a rate hike in August, up from 40 percent at the start of this month. That’s still well short of the more-than 90 percent pricing assigned to a May hike a month before the decision.

“We’ve always made clear that the ultimate policy choices would be determined by the data,” Ramsden said in a Bloomberg interview last month. “What happened between February and May is that the data changed, and that framed our decision.”

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