Storms Hurt U.K. Economy, But May Not Blow BOE Off Rate Course

(Bloomberg) -- Bad weather in March has taken a toll on the U.K. economy, but the ‘Beast from the East’ may not be enough to shake the Bank of England from its path toward another interest-rate increase.

Reports this week showed snow and storms dragged growth in services to its weakest in almost two years, and saw the construction industry shrink for the first time in six months. While the pound fell after the services report, investors are still pricing in an around 85 percent chance of the BOE hiking rates in May. That’s little changed from last week.

Storms Hurt U.K. Economy, But May Not Blow BOE Off Rate Course

IHS Markit, which published the industry reports, said the weather, along with a drag from subdued consumer demand and “heightened economic uncertainty,” means overall economic growth probably slowed in the first quarter. It estimates expansion of 0.3 percent, down from 0.4 percent at the end of 2017.

The BOE has already factored in the hit from the bad weather, and downgraded its own estimate for the quarter. According to Markit, that means the Monetary Policy Committee’s widely expected rate increase in May is still on the cards, an assessment shared by Scotiabank economist Alan Clarke.

With the relatively poor readings attributed to the bad weather, “the weakness is likely to prove transitory and hence forgivable from the perspective of the MPC,” Clarke said. “Overall, I suspect the MPC looks through this.”

Markit’s services Purchasing Managers Index dropped to 51.7 from 54.5 in February, far lower than economists had forecast. The construction index slipped to 47, indicating contraction, while the PMI for manufacturing was little changed at 55.1. That left the composite reading at the lowest level since July 2016.

What Our Economists Say:

“It might be tempting to read the weak composite PMI data for March as a reason for the Bank of England to leave interest rates alone next month. But the survey was hit by heavy snowstorms and should rebound in coming months. May remains the most likely time for the next rate hike.”

--Dan Hanson and Jamie Murray, Bloomberg Economics

At Unicredit, Daniel Vernazza said the PMI decline was a “worry,” but agreed that it wouldn’t stop a May interest-rate increase. It would be the second hike since November, when the BOE raised its benchmark for the first time in more than a decade

Separately on Thursday, figures showed that car sales fell almost 16 percent in March from a year earlier. While there may be some element of weak consumer demand playing a part, the figures were skewed by a surge in March 2016, when buyers moved to get ahead of a tax increase.

Within services, while business optimism remained solid in March, it has weakened since the start of the year, and is now at its lowest since June 2017. IHS Markit said Brexit uncertainty has played a part in holding down sentiment. Measures of employment and new business also declined.

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