BOE Rate Cut Prospects Hammer Pound After Economy Deteriorates
Mark Carney’s last monetary policy decision as Bank of England governor could prove to be a dramatic one as the weakening economy pushes traders to raise the odds on an interest-rate cut to a coin toss.
Comments from rate-setters in the past week have surprised investors and economists by signaling that the Monetary Policy Committee’s views are more finely balanced than previously expected. Gloom over the outlook was compounded further on Monday when data showed the economy shrank in November, ahead of the general election, casting doubt over whether there was any growth at all in the fourth quarter.
The pound fell as much as 0.8% after the GDP data were published and was trading below $1.30 as of 3:53 p.m. in London. Money markets are now pricing a 50% chance of a rate cut this month, up from 25% on Friday.
The BOE’s decision will be announced on Jan. 30, when officials will publish fresh forecasts on growth and inflation. The central bank will also unveil its annual review of the supply side of the economy, which will include crucial analysis on the extent of the supply shock from the U.K.’s departure from the European Union.
It is Carney’s final meeting before he steps down in March to be replaced by Andrew Bailey. Here’s where the debate stands:
The BOE’s nine policy makers set the benchmark rate by majority vote. Michael Saunders and Jonathan Haskel have called for a reduction since November, so they only need three more to join them to sway the decision.
They might get it. In the past week, Silvana Tenreyro said she may support a rate cut in the next few months if uncertainty around future trade arrangements or sluggish global growth continue to weigh on the economy. Gertjan Vlieghe made an even more urgent case in a Financial Times interview published at the weekend, saying he’d need to see a significant improvement in the data to justify waiting any longer before voting to cut.
The key voter is probably Carney, and he indicated last week that he sympathizes with the rationale for more stimulus.
The remaining four MPC members -- Ben Broadbent, Jon Cunliffe, Dave Ramsden, and Andy Haldane -- all voted in December to keep policy unchanged and haven’t given any recent public remarks.
Monday’s GDP data provides somber reading, with the U.K.’s dominant services sector contracting. Inflation is also below the BOE’s 2% target, and economists see it staying under the threshold when new figures are published this week.
Officials will most likely be looking at how the economy performed in the wake of Boris Johnson’s election win last month. While surveys taken after the vote suggest his victory delivered a boost to confidence, that momentum may not last. Cracks are starting to appear among consumers, a mainstay of U.K. economic growth, with retail sales posting their worst year on record.
There’s plenty more data to come that could still convince officials to keep rates on hold for now. Figures on retail sales are due this week and PMI surveys published closer to the end of the month will also be crucial in informing the debate.
What Our Economists Say...
“Our central forecast is for uncertainty to ease, prompting a turnaround in the outlook for the economy that prevents the MPC from cutting in the near term. But we recognize this call hangs in the balance.”
-- Dan Hanson, Bloomberg Economics. Read his U.K. REACT
In a December speech explaining his vote for a cut, Haskel said that with little room for looser policy, it was better to act sooner rather than later to “reduce the probability of the economy of getting stuck at the effective lower bound.” That worry is one possible explanation for why the MPC has turned impatient so quickly, according to JPMorgan Chase & Co economist Allan Monks.
Brexit is set to happen at the end of the month, but many doubt Johnson can deliver on his pledge to strike a trade deal with the bloc by the end of the year. If he fails, Britain will once again be facing a disruptive cliff-edge departure.
U.K. companies have had a difficult time since the 2016 referendum, wasting resources on stockpiling and contingency planning in anticipation of deadlines that have come and gone, and withholding investment as a result. The way firms react to the next phases of the divorce process -- and what opportunities they’ll have to maintain business with the country’s biggest trading partner -- will be crucial in deciding the U.K.’s economic fate.
The performance of the rest of the world is especially important for an open economy like the U.K., and tensions beyond the Brexit debate look set to persist into 2020. While the U.S. and China plan to sign the first phase of a trade deal this week, that’s unlikely to lead to any upswing in global growth. The flare-up between the U.S. and Iran could also weigh on sentiment.
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