The Bank of England will raise interest rates in August, a Reuters poll found, but that call is hanging in the balance as policymakers await confirmation that Britain’s economy is past a slump that set in earlier this year.
In a poll taken ahead of the bank’s May meeting, economists were convinced it would pull the trigger that month only for them to make the biggest such turnaround in Reuters polls history a few weeks later to say policymakers would hold fire until August.
That dramatic about-face came after dovish comments from BOE governor Mark Carney and a slew of downbeat data suggesting Britain’s economy was barely growing.
The median in the latest survey, taken from June 4 to 7, was still for a 25-basis-point lift to 0.75 per cent on August 2. But 40 per cent don’t expect a move then either - despite 69 of 76 economists in an April 18 poll having a 25 basis point increase pencilled in for May 10, which never happened.
“We still believe the hiking cycle is postponed and not cancelled after the May meeting. Our base case is that the next hike comes in the second half of the year,” said Mikael Milhoj at Danske Bank.
Bank of England deputy governor Dave Ramsden said on Thursday that recent data supported the central bank’s view that the sharp slowdown of growth in Britain’s economy in a wintry start to 2018 would prove temporary.
Financial markets are pricing in a little over a 50 per cent chance of an August hike, when the bank next updates its economic forecasts and holds a news conference. None of the 63 economists polled expect any move up from 0.5 per cent at the Monetary Policy Committee’s meeting on June 21.
Britain’s economy almost flat-lined at the start of the year, at least in part due to heavy snow, but better-than-expected business surveys this month have stoked expectations the bank will see that downturn as temporary.
There is now a 20 per cent chance of a recession in the next 12 months, up from 10 per cent given in April, and while growth will accelerate from the 0.1 per cent at the start of the year to 0.3 to 0.4 per cent per quarter through to the end of 2019 it will still lag the eurozone.
Inflation, driven up above the bank’s two per cent target by sterling’s fall after the Brexit vote, will average 2.5 per cent this year before falling to 2.1 per cent next and to 2.0 per cent in 2020.
Britain is due to leave the EU in less than a year and there is still little clarity on what relationship London will then have with the bloc.
With only 10 months to go, time is pressing in the Brexit talks, which have all but stalled as Prime Minister Theresa May tries to overcome the divisions not only in her cabinet of ministers but also in her Conservative Party.
MPs will vote next week on May’s Brexit blueprint. That could increase the probability of a ‘soft’ Brexit but could also cast doubt on whether May will remain in charge.
In the latest poll, there was only a median 20 per cent chance of a disorderly Brexit, where no deal is reached by the end of March 2019, unchanged from May.
“Soft Brexit chances have improved because the UK has been giving concession after concession,” said Alan Clarke at Scotiabank.
“The flipside is that if you give too much away the hard Brexiteers may overthrow the prime minister, have another election, then you get a hard Brexiteer and then you get a cliff-edge Brexit.”
Brussels and London were most likely to agree on an EU-UK free trade agreement, the latest poll found, chiming with all Reuters polls taken since the June 2016 referendum.
Second most likely option was membership of the European Economic Area, under which Britain would pay to maintain full access to the EU Single Market.
The third most likely was leaving without a deal and trading under basic World Trade Organisation rules.
Those two options had flipped in the May poll, suggesting economists thought there was more chance of a soft Brexit, but the split remains close.
Britain staying in the EU, with Brexit cancelled, was far and away the least likely option.