BOE may cut rates even if key economic number improves

Bloomberg

The most up-to-date measure of the UK economy looks set to improve this week — yet it might not be sufficient to deter the Bank of England (BOE) from cutting interest rates.
With policy makers signalling they’re considering a rate cut to preempt possible weakness in the months ahead, and recent data backing their case, IHS Markit’s monthly survey of private-sector business activity has emerged as a make-or-break indicator.
The good news: analysts expect the purchasing managers’ indexes to tick up. The bad news: probably not enough to dispel concerns that the economy is fragile after years of Brexit uncertainty, and with just 11 months to seal a trade deal with the European Union.
A spate of feeble data in the past week or so, added to dovish remarks by policy makers including Governor Mark Carney, means investors now see about a 70% chance of a rate cut on January 30. Unless the PMI rockets, they’re unlikely to change their view. Bloomberg Economics, which predicts a reading of 51.5, says anything below that number would open the door for a cut, while Danske Bank put that level at 51.
So far, a Bloomberg survey puts the expected composite reading at 50.7 for January. That would be up from 49.3 in December — a significant change as 50 is the dividing line between expansion and contraction — but not enough. A subindex for services is also seen above 50, while the manufacturing subindex is likely to remain in contraction.
The gauges are published weeks before official data, and are therefore leapt upon by investors trying to judge the prospects for rates, currencies and financial securities. A jump could still prompt repricing of bets for a rate cut, and provide some relief for the beleaguered pound. The currency fell 0.3% last week, leaving it down 1.8% in 2020.
“I don’t think January’s a foregone conclusion by any stretch,” said Dean Turner, an economist at UBS Wealth Management. “If we get a decent bounce” in the PMIs, then “that certainly leans in the direction of staying on hold.”

Brexit Issues
Still, IHS Markit’s PMIs have previously come under criticism. While they measure sentiment, Carney said last year that they can be a misleading indicator of economic output in times of extreme uncertainty.
For example, in the immediate aftermath of 2016’s Brexit vote, they presented a far gloomier picture of the economy than ultimately came to pass, a phenomenon that repeated itself last year.
They can also be volatile. IHS Markit switched in November to releasing a flash estimate, based on 85% of responses, and then a final reading a week later.
In both months since, the initial figure has been revised higher upon the second reading, with December’s services number seeing a particularly big jump as post-election data trickled in.
A quirk of the BOE’s timetable means they’ll be without the second reading this time round. The bank’s first decision of the year was moved to accommodate Carney’s planned departure from the governorship on Jan. 31. The usual date of the first Thursday in February would have allowed officials to see the final reports, along with other data including consumer confidence.
Whatever the decision, Carney will have to live with it for a while longer. He’s now extended his tenure to the middle of March, when he’ll hand over to his successor, Andrew Bailey, the current head of the Financial Conduct Authority.