By Jamie McGeever / ReutersBy not raising interest rates on May 10, the Bank of England may just have brought the curtain down on one of the tamest tightening cycles in central banking history.
Markets no longer expect the Bank to raise rates this year after it cut its economic growth, inflation and wage growth forecasts. Sterling fell on the global foreign exchanges and is now down 6 percent against the dollar since mid-April.
The Bank insists that the slowdown in the first quarter of the year was a temporary soft patch and that the underlying economic fundamentals remain strong. Gov. Mark Carney said momentum will build up again as the year progresses.
Yet the window of opportunity to follow November’s rate hike to 0.50 percent, when inflation was already above target and nudging 3 percent, may have closed completely. A hiking cycle consisting of only one quarter-percentage-point increase barely quali-fies as a cycle.
Another rate rise is now only fully priced by May next year, according to British money markets. But these expectations can change rapidly — less than a month ago, the probability of a hike today was as high as 90 percent.
Then the first official estimate of Q1 GDP was released. Only one of 41 contributers to a Reuters poll correctly forecast the 0.1 percent quarter-on-quarter growth rate.
It is Britain’s sluggish growth that remains the biggest obstacle to raising rates. That Q1 shock looks to have been instrumental in the Bank cutting its GDP forecast for this year to 1.4 percent from 1.8 percent, and trimming its 2019 and 2020 outlook.
As Carney repeated, the darkest cloud on the British economic horizon is Brexit. Britain leaves the European Union on March 29 next year, and there will be a transition period to the end of 2020, but huge uncertainty surrounds the terms of departure, trade agreements and customs arrangements.
Growth of 1.4 percent this year will put Britain at, or very near, the bottom of the developed world league.
Even before the BoE’s decision on Thursday, analysts at HSBC cut their year-end forecast for the benchmark 10-year gilt yield to 1.00 percent from 1.30 percent because growth is so weak. Economists at the same bank said they do not expect the BoE to raise rates this year or next.
Everywhere you look, the economic argument for raising rates is weakening. House prices are falling, most notably in London, retail sales are soft because the consumer is so stretched, and the services sector is “on pause” because of Brexit, according to Mizuho’s Peter Chatwell.
Even inflation is easing back. That may change, with Brent oil prices the highest since 2014 at $77 a barrel. But domestically generated inflation pressures, namely wage growth, shows no sign of accelerating sufficiently to force the Bank to act. Indeed, the Bank lowered its 2018 earnings growth forecast.
Carney and his colleagues will keep beating the rate hike drum, even if only lightly, to keep a floor under sterling. The BoE highlighted market pricing that currently points to three quarter-point hikes over the next three years.
In 2014 one British lawmaker likened the Bank to an “unreliable boyfriend,” a label that has stuck and which, judging by Carney’s news conference on May 10, clearly irritates him.
If, and when, the Bank is ready to pull the trigger on rates again, it will have a tough task convincing markets it will follow through.