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London - The hawks circling over the Bank of England (BoE) may have just got their wings clipped.
Unexpectedly weak manufacturing, construction and trade data on Friday all darkened the economic outlook, casting doubt over the U.K.’s performance in the second quarter and reining back expectations of tighter policy.
The data follows weeks of speculation that the BoE may raise rates as soon as their August meeting, sparked by dissenting calls for a hike by three of eight voters at their June meeting and a fourth subsequently suggesting he might follow suit. Even Governor Mark Carney last week shifted his emphasis, saying that policy makers may need to begin raising and will debate it in the coming months.
Yet with all having emphasized the need for signs of further strong momentum in the economy, that discussion looks likely to take on a more dovish tilt when they reconvene to decide on rates and agree new growth and inflation forecasts next month. The pound reversed gains to fall 0.6 percent after the data was published on Friday.
“This probably adds weight to our view which is that the bank is more likely to leave rates on hold until next year,” said Paul Hollingsworth, an economist at Capital Economics. “We’d need to see clear signs that the economy is accelerating rather than slowing for them to want to start hiking.”
Output drop
Manufacturing fell 0.2% from April as vehicle production dropped the most in more than a year, the Office for National Statistics said on Friday. Total industrial production declined 0.1% and building output shrank by 1.2%.
There was also disappointing news on trade, as the deficit grew to £3.1bn. Imports of goods rose 3.9%, far outstripping a 0.9 gain in exports and underscoring warnings earlier this year by Deputy Governor Ben Broadbent that the post-referendum and pre-Brexit “sweet spot” for exporters may not last.
The data cast doubt on whether 0.4% economic growth can be achieved in the second quarter, as currently predicted by the BoE and Bloomberg’s own survey of economists. The expansion cooled to 0.2% in the first three months of the year, ending the resilience it has shown since June’s referendum to leave the European Union.
BoE policy maker Ian McCafferty, who voted for a rate increase in June, said on Thursday that the bank will probably remove some stimulus if the economy develops as forecast. Investors see about a 50% chance that UK rates will rise by the end of the year.
Yet political instability, the start of Brexit negotiations and the strain on households from the rising cost of living are all weighing on the prospects for investment and consumer spending, with recent PMI surveys also pointing to a loss of momentum going into the second half.
Officials will also be wary of recent cases where interest rates rose too quickly. Jean-Claude Trichet, then president of the European Central Bank, pushed through two rate hikes in 2011 only to see the economy slide back into recession, forcing the bank to reverse course. The ECB hasn’t increased rates since. For its part, the BoE hasn’t raised borrowing costs in a decade.
With the outlook becoming more nuanced, the spotlight will shine brighter on officials’ public comments and economic releases in the run up to the August 3 meeting. Data next week is expected to show the slowest wage growth since 2014, adding to pressure on household budgets.
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