Weak U.K. Data Clouds the BOE’s Interest Rate Plan
If the BOE doesn’t raise its key interest rate, the big question is whether it will continue to indicate that a series of increases will be needed to tame inflation
LONDON—When the BOE last published forecasts for growth and inflation in February, Gov. Mark Carney said the key interest rate would have to rise “somewhat earlier and to a somewhat great extent than we had thought.” Investors immediately looked to May 10 for liftoff, holding to that belief until mid-April, when a combination of fresh guidance from Mr. Carney and a series of very weak economic data releases changed the opinion of most BOE watchers, who now expect the key rate to remain at the crisis-era setting of 0.5%. Assuming they prove to be right, the big question is whether the BOE views a poor first quarter as a temporary setback, or abandons plans for a move this year. Here are five questions that may be answered on the BOE’s latest ”super Thursday”:
1. The rate decision
A very weak economic performance during the first quarter makes a second rate rise in six months unlikely, but such a move is still possible. The BOE is worried that weak productivity growth and subdued investment since the 2016 Brexit vote make it difficult for the economy to meet almost any strengthening of demand without overheating. If it views the first-quarter slowdown as a blip, and still believes growth will exceed its 1.5% speed limit for the year as a whole, it could decide to move now, rather than wait and allow medium-term inflationary pressures to build.
2. Guidance
If the BOE doesn’t raise its key interest rate, the big question is whether it will continue to indicate that a series of increases will be needed to tame inflation. Given its difficulties delivering on more specific guidance in the past, some analysts believe it would be wise for the BOE to be quite vague about the exact timing of any such move.
3. Forecasts
New forecasts for growth and inflation will be key to working out what the BOE plans to do next. A slightly lower growth forecast could still point to a rate rise later this year, but a significantly reduced projection would place that in doubt. Most BOE watchers expect only a small tweak to its 1.8% projection for this year and next, and anywhere below 1.5% would put a 2018 rate move in doubt.
4. Votes
Gov. Mark Carney tends to attract most of the attention from all but the most dedicated of BOE watchers, and his signal that a May move isn’t guaranteed had a big role in changing sentiment ahead of Thursday’s announcement. But what the other eight members of the Monetary Policy Committee think is important, and a close vote would suggest a rate rise is still on the cards as early as August.
5. Brexit
As ever, Mr. Carney will stress that the U.K.’s impending departure from the European Union is the most significant factor affecting the economic outlook. And there is much uncertainty on that front, with the government yet to work out a way of leaving the bloc’s customs union without creating a hard border in Ireland. Mr. Carney avoids real-time commentary on the Brexit process but may give some guidance as to how that might affect future monetary policy decisions.