Eyes will be on the Bank of England next Thursday when it is expected to keep interest rates on hold at 0.5 per cent.
Last time around – when the Bank released some gloomy forecasts on the UK economy – two members of the monetary policy committee voted to raise the bank rate to 0.75 per cent, while the remaining seven voted to hold.
So a hike next week is unlikely, especially given the mixed bag of signals on the economy that has emerged in recent weeks.
England governor Mark Carney has a difficult decision to make but is unlikely to rise rates
The MPC’s primary target, consumer prices index inflation, remained level at 2.4 per cent in May – which means there are no drastic measures required on rising prices. Although increases in the world oil price are starting to drive up fuel costs at the pump, which may feed into CPI in the coming months.
Those calling for a rate rise will point towards May’s unexpectedly strong retail sales: the latest Office for National Statistics data showed that sales by volume surged nearly 4 per cent in May.
Although these have to be set against the spate of High Street closures and administrations that has continued from last year into this. This week alone Poundworld – an employer of over 5,000 people – hit the buffers, and House of Fraser unveiled plans to dispose of more than half its stores.
But manufacturing data this week probably put the kibosh on any lingering possibility that more MPC members would vote for an increase next Thursday.
The ONS said UK manufacturing output fell 1.4 per cent in April, marking the worst month for British factories in close to six years and pointing to an economy that’s not firing on all cylinders.
Howard Archer, chief economic adviser to the Ernst & Young Item Club, said it was ‘a miserable and thoroughly worrying set of UK data that fan concerns over the UK economy’.
The news, which coincided with weak figures for trade and construction, triggered a slide in the value of sterling (to below $1.34 against the dollar) as investors reacted by betting against a summer rates rise in droves.
The bank of England in London’s financial district
Wage growth, which is being watched closely by the Bank as a case for raising rates, has slowed too, with the last set of figures showing average earnings rose 2.5 per cent in the year to April, down by 0.1 per cent on the previous month.
So although as economists many on the MPC feel that interest rates should be slowly brought back to ‘normal’ levels, most will be reticent to risk hitting business and households with a rise when the finances of both are in the balance.
The questions remains when, if not now, the Bank of England actually will put up interest rates.
The bank has already said it will wait and see how the data unfolds over the coming months before taking the leap which, according to economists, means the door remains firmly open for a rise in August.
Archer says ‘it is currently touch and go’, floating the possibility of the bank delaying until November.
‘There will need to be sustained clear evidence that the UK economy has improved since the first quarter for the MPC to act,’ he says.
While the Bank writes off much of the early 2018 slowdown as disruption caused by the Beast from the East, there’s not enough compelling evidence yet to argue that the economy is well and truly revived and ready for a rates rise.
But holding off now ups the chance of multiple rises next year instead, as the bank strives to bring rates in line with more normal levels after over 10 years at emergency lows.