The Bank of England is set to hold interest rates next week after a slow start to the year for the UK economy.
The central bank’s monetary policy committee will vote on the bank rate, currently at 0.5 per cent, on so-called ‘Super Thursday’ alongside the release of a flood of economic data.
Mortgage borrowers have seen a slight rise in costs since the bank’s decision to increase the base rate from 0.25 per cent to 0.5 per cent last November, and even savers have seen the rates on their deposits inch up from rock-bottom levels.
It is thought the bank will opt for a 0.25 per cent hike in the summer instead, maybe as early as May, as it waits to see if a stronger-than-expected uptick in gross domestic product towards the end of 2017 has lasted.
The bank is expected to raise rates at least once this year. Many predict it will rise in May
A gloomy set of data published on Friday appeared to suggest it hadn’t, with a slowdown for the construction industry in January stoking fears growth had been short-lived.
House building activity fell to a 16-month low and manufacturing output slipped unexpectedly in January as the industry struggled to balance slowing growth with escalating costs.
The Markit/CIPS UK construction manager’s purchasing index (CPI) stood at 50.2 in January, near to neutral growth levels.
‘This is disappointing for hopes that the economy can sustain the improved performance seen in the fourth quarter of 2017 when GDP grew 0.5% quarter-on-quarter,’ Howard Archer, EY Item Club’s chief economic adviser said.
‘Much will depend on how the dominant services sector is faring,’ he added.
As well as economic signals, a lot of the decision hinges on the progress of Brexit talks over the coming months and its impact on the pound, trade and inflation.
Bank governor Mark Carney has already made this clear, telling the World Economic Forum in Davos last month that Britain’s ability to secure a deal with the EU will determine its ability to grow, and therefore the path of rates.
Man at the top: Governor Mark Carney said Brexit talks will influence the bank’s policy during his speech at the World Economic Forum in Davos last month
John Wraith, an economist at bank UBS, said strong momentum in the economy in 2018 could give the bank’s decision makers the opportunity needed to hike rates.
‘However, there are growing doubts about whether the UK and EU will agree on a transitional deal by the time of the EU Council Summit in late March, and failure to do so would in our opinion stay the bank’s hand as uncertainty intensifies and the economy slows more materially,’ he added.
Along with the latest interest rate decision, the bank is expected to publish minutes from the vote and meeting, an inflation report and an annual ‘stock take’ of spare capacity in the economy.
Mark Carney is also due to publish his letter to Chancellor Phillip Hammond explaining what has been done to rein in inflation, which overshot the bank’s two per cent target last year and hit 3.1%.
Most important will be the hints dropped by the bank about the likelihood of a rate rise over 2018 and 2019 as this could impact how markets move in the months ahead.
Economists at banking group Investec are among those predicting a 0.25 per cent hike in rates in May this year.
They said: ‘The crucial issue for this ‘Super Thursday’ is what guidance the BoE gives on the likely path for UK interest rates going forward.
‘In November, the Bank appeared broadly content with the market path for interest rates outlined in that report, namely around two hikes over 2018 and 2019.
‘One question for next week is whether the BoE wishes to signal a slightly more aggressive pace of rate rises, perhaps signalling the possibility of three rate rises over this time.’
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