BOE set to keep policy unchanged after a roller-coaster buildup

Bloomberg

The Bank of England (BoE) will probably keep interest rates unchanged this week after an economic roller coaster that saw market bets on an increase flip from near-guaranteed to almost no chance. A majority of the nine Monetary Policy Committee members will vote to maintain a 0.5 percent benchmark on Thursday, according to a Bloomberg survey of economists.
Governor Mark Carney will address a press conference, and the central bank will also publish new forecasts, crucial in explaining why policy should stay on hold for now but still be tightened in the next few years. Two officials may vote to hike, keeping alive the prospect of tightening later in 2018.
The BOE’s new outlook is likely to point to excess demand and inflation, an “intolerable” combination that indicates an overheating economy in need of tighter monetary policy, according to Philip Rush, an economist at Heteronomics.
With investors leaning towards a move in August, officials are also expected to emphasise their reliance on how the data turns out.
Brexit looming over the outlook means that growth could fail to recover from its first-quarter dip and inflation stay firmly above the BOE’s target.
The economic backdrop, for the moment, is mixed. Inflation has slowed more than the Monetary Policy Committee expected. The panel flagged back in February that their view of the pass-through of the weaker pound to inflation could be incorrect, so the recent weakness in the data means they may need to re-evaluate it. That could lead to some downgrades to the inflation projection, according to Bloomberg Economics analysis.
The BOE was expecting weak first-quarter growth, but not as dismal as 0.1 percent. That was the estimate from the Office for National Statistics, which played down the impact of severe weather. The big question is whether it’s temporary, or the beginning of a more protracted slowdown.
If the latter, the economy would be growing far more slowly than its potential rate and would be less at risk of overheating, reducing the need for rate hikes.
On the other hand, officials might argue that the figure will eventually be revised up, since the ONS estimate is based on less than half of the data that will eventually be available.
So far, the evidence points to an underlying loss of momentum. Purchasing Managers Indexes for services and manufacturing were both worse than economists expected in April, and IHS Markit’s estimate of the rate of economic growth fell. The services industry, which makes up the biggest part of the economy, saw only a modest rebound from the 20-month low posted in March. Tuesday brought further gloomy news, as lender Halifax said home prices plunged the most in eight years in April amid waning interest from potential buyers.