Banks have pushed out their predictions for when the Bank of England will raise interest rates after data last week showed a sharp and unexpected slowdown in Britain’s economic growth.
Expectations that the British central bank would raise borrowing costs in May had already weakened after governor Mark Carney highlighted ‘mixed’ economic data and noted there were also ‘other meetings’ this year in an April 19 interview.
Economists now forecast the BOE will not act until August and may even wait until 2019. Before Friday’s GDP data most economists had expected the central bank to tighten monetary policy this month.
The changed expectations have hurt the pound, which has fallen sharply in value since the GDP release.
Economists had expected the BOE to tighten monetary policy
HSBC became the latest bank to erase its solitary rate hike call for 2018, saying on Monday that likely downward revisions to the BOE’s growth forecasts in May would make it harder to justify a rate hike.
“Our view of no rate rises beyond May remains intact: we’ve gone from ‘May and done’ to just ‘done’,” Simon Wells and Elizabeth Martins, analysts at the bank, wrote in a note.
The BOE raised interest rates for the first time in a decade last November, by 25 basis points to 0.5 per cent.
Market expectations of a rate hike in May, as measured by swap markets, have fallen following the GDP data to less than 20 per cent from around 50 per cent. Friday’s figures showed Britain’s economy expanded by just 0.1 per cent between January and March, the weakest quarter since 2012.
Earlier this month the market was pricing in as much as a 90 per cent chance of a May rate rise.
The change in banks’s forecasts signals a much weaker outlook for the pound, which has been among the best performing major currencies in 2018. For the year, it is now up less than two per cent against the dollar after having been up more than six per cent two weeks ago.
Expectations of higher rates lifted sterling to its highest since the Brexit referendum in June 2016 at $1.4377 on April 17 but it has tanked nearly five per cent since then, to $1.3715 on Monday.
The likelihood that the BOE will not hike next month also means bond prices could rally further and presents a more volatile backdrop for the UK stock market.
UBS scrapped its estimate of a single rate rise in 2018 after the weaker-than-expected growth figures while Nomura, which has long been hawkish on UK interest rates, now sees a first hike in August.
John Wraith, a UBS economist, said inflation could fall back to target of two per cent later this year and that concerns about talks between Britain and the European Union over the terms of their divorce could resurface.