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U.K.'s Snow-Hit Start to 2018 Is Suddenly Key to Next BOE Move

U.K.'s Snow-Hit Start to 2018 Is Suddenly Key to Next BOE Move

(Bloomberg) -- With the Bank of England’s next interest-rate decision now on a knife-edge, all eyes are trained on an expected slowdown in the first quarter and what it means for policy.

Growth probably slowed to 0.3 percent in the three months through March from 0.4 percent the previous quarter, according to a Bloomberg survey of economists. That’s in line with the central bank’s own forecast, which was downgraded after unseasonably bad weather hit activity.

U.K.'s Snow-Hit Start to 2018 Is Suddenly Key to Next BOE Move

The importance of the figures -- to be published Friday -- has been heightened by Mark Carney’s unexpected comments that have damped expectations that the BOE will raise its benchmark rate in May. A hike was seen as a done deal by markets and economists until Thursday, when the BOE governor noted recent soft data and said officials are “conscious that there are other meetings” at which they could act this year.

The question for policy makers is whether the recent weakness, which was partly due to snowstorms, is temporary or marks another leg down for the economy.

“The U.K. economy undoubtedly went through a bumpy patch in the first quarter of this year,” said James Rossiter, an economist at TD Securities.

According to TD, anything less than 0.2 percent would suggest “more at play than snow and could yield a pause in May in favor of an August hike.”

Carney’s comments led to market pricing on May dropping to below 60 percent from more than 80 percent earlier in the week.

Even if the central bank doesn’t hike in May, comments from policy maker Michael Saunders on Friday highlighted that the real question is when, not if, the bank tightens policy again. He said that spare capacity is eroding, the labor market is tightening and domestically generated cost pressures are picking up. Saunders, along with policy maker Ian McCafferty, wanted to raise rates in March, though the seven remaining MPC members voted for no change.

“It is looking like a very close call,” said Paul Hollingsworth, an economist at Capital Economics. “Regardless, the bigger picture is still that we expect interest rates to rise at a faster rate than markets anticipate over the next few years.”

To contact the reporters on this story: Jill Ward in London at jward98@bloomberg.net, Harumi Ichikura in London at hichikura@bloomberg.net.

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Andrew Atkinson

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