The Bank of England Is On Course for an August Rate Hike
(Bloomberg) -- Bank of England policy makers are adjusting to an upheaval at the statistics office at the very point when they need as much clarity as possible to help decide whether to raise interest rates next month.
The U.K. is this week shaking up the way it reports growth, publishing monthly updates and delaying its usual quarterly figures. The new process comes after most policy makers said they were waiting to see how the economy evolved before hiking rates again -- a move investors and economists now expect to come in August.
While the new system means that BOE officials won’t have an estimate for second quarter growth when they next meet, Governor Mark Carney said last week that he’s “serene” about the change. That may be in part because the BOE has previously questioned the accuracy of Office for National Statistics estimates, relying instead on its own analysis.
Investors are currently pricing in about an 80 percent probability of a rate hike on Aug. 2. Asked last week whether the BOE would have enough information to make a decision next month, Carney said “the short answer is yes.”
But while the BOE may feel it has a handle on the data, the unpredictability of politics is another factor. Prime Minister Theresa May has been plunged into a major crisis after Brexit Secretary David Davis resigned late on Sunday. Still, markets were largely unperturbed by the latest development, with sterling up 0.4 percent to $1.3341 as of 10:06 a.m. London time.
In a report Monday the British Chambers of Commerce highlighted Brexit as a key factor behind sluggish growth in the U.K. economy. The report also flagged tougher trading conditions for consumer-facing industries thanks to subdued spending.
The ONS will start producing monthly estimates from July 10, based on data for services, production and construction. Economists surveyed by Bloomberg expect it to show the economy expanded 0.2 percent in the three months through May from the previous period.
Crucially for the U.K., the monthly data for services -- the largest part of the economy -- will be brought forward by two weeks. Quarterly GDP estimates, meanwhile, will be pushed back by 15 days, with the first release on Aug. 10, after the BOE’s next policy announcement. That’s to improve quality, the ONS says, and could help reduce the possibility of revisions.
Among Group-of-Seven nations, Canada also reports GDP on a monthly basis, although their reading for May isn’t due until July 31.
What our Economists Say:“The new rolling monthly series is likely to show the economy is on track to rebound in 2Q, banishing concerns that the soft first quarter was more than just a blip. We expect the Bank of England to respond with a rate hike in August.”
- Dan Hanson and Jamie Murray, Bloomberg Economics. Read a full preview here.
Numbers for the current quarter are being closely watched after policy makers and statisticians differed on the economy’s strength in the first three months of the year, when storms and snow battered the U.K. Growth was first estimated at 0.1 percent, a figure the BOE said it expected to be revised higher, and it’s since been pushed up to 0.2 percent.
Recent incoming numbers have been stronger, and Carney said last week that he’s more confident the U.K. is rebounding from the sluggish start to the year.
While he didn’t offer specifics on the timing of the next hike, he said that if the economy continues to perform as policy makers expect, “an ongoing tightening of monetary policy over the next few years would be appropriate to return inflation sustainably to its target.”
“The case is strong enough” for an August move, said David Owen, chief European economist at Jefferies Group LLC. “They still probably believe first quarter growth was up 0.3 percent -- not the 0.2 percent now recorded -- and will obviously have their strong views about the second and third quarter.”
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