The Bank of England’s (BOE) Monetary Policy Committee (MPC) meets today and is expected to keep interest rates unchanged, marking a sharp turnaround from early projections just a few weeks ago.
A month ago, short-term interest rates had been pricing in another 25 basis point rate hike with near certainty (90 percent odds). But Governor Mark Carney lowered expectations after dovish comments he gave in an interview, referring to data that was coming in on the “softer side.” He added that there “may be some differences of view at the May meeting, but that it is a view we take … conscious that there are other meetings over the course of the year.”
Markets were quick to slash hiking odds in May to 50 percent. Only a week later, the first quarter GDP (gross domestic product) print came in at a tepid 0.1 percent quarter on quarter, below consensus of 0.4 percent and the BOE’s own forecast of 0.3 percent. Short-term interest rates are now pricing in less than a 10 percent probability of a hike this Thursday.
While first-quarter GDP data disappointed, analysts at Goldman Sachs point out that only 45 percent of preliminary estimates are based on observed data, with the rest being modelled. This explains why preliminary estimates tend to be revised and this print is no different. They add that the slowdown in retail, a pick-up in electricity and gas and an outright contraction in construction typically mirrors the weakness associated with unseasonably cold weather, supporting the premise that the weak print was hampered by one-offs rather than a more structural slowdown.
The market will also be looking for further clues from the updated inflation projections in the BOE’s inflation report. In February, the MPC had inflation returning to 2.1 percent over its forecast horizon (slightly above a stated target of 2 percent), contingent on a rate hike path that included three hikes cumulatively.
Source: Bloomberg Pro Terminal
Trader Aleksandar Kumanov