April 29, 2019
By David Milliken
LONDON (Reuters) – A six-month delay to Brexit gives Britain’s central bankers space to take a broader view of the economy this week, but persistent uncertainty over leaving the European Union makes them unlikely to raise interest rates any time soon.
Since the Bank of England’s rate-setters last met in March, Prime Minister Theresa May has managed to push back the Brexit deadline to Oct. 31, shifting the Brexit cliff-edge further away than at any of their meetings since September.
But even with the immediate risk of a no-deal Brexit shock to the economy removed, most analysts expect the BoE to hold off on raising rates until Britain is out of the EU with some form of deal.
“While we see the need to raise interest rates slowly … the Bank of England is likely to sit on its hands until more clarity on the Brexit outcome is received,” said Nomura economist George Buckley, who predicts a rate rise in November.
None of the 75 economists polled by Reuters expect the BoE’s Monetary Policy Committee to raise Bank Rate from 0.75 percent this month, and only half a dozen predict a rate rise before Brexit is due.
The median forecast is for a rate rise in the first quarter of next year — when Governor Mark Carney will hand over to a successor. A large minority do not expect rates to rise at all this year or next, echoing financial market pricing.
So there is a risk that investors could be thrown by even mildly hawkish noises from the BoE on Thursday.
“The prospect of a hike in coming months is still dim, but less remote than market pricing,” UBS interest rate strategist John Wraith said.
SCOPE TO TIGHTEN?
Unlike the European Central Bank, the BoE faces inflation that is soon likely to rise above target, and in contrast to the U.S. Federal Reserve it has only raised rates twice in the current economic cycle, most recently in August 2018.
Wage growth, retail sales, job creation and overall economic growth have been slightly stronger than the BoE’s expectations in early 2019, even if businesses and consumers are downbeat.
“The bar in the macroeconomic data for another rate hike is low … but the BoE would need to find a window in a busy political calendar to deliver a hike this year,” J.P. Morgan economist Allan Monks said.
As well as no end to the Brexit impasse, risks that could delay a rate rise include a serious challenge to May’s leadership from within her Conservative Party, a fresh national election or a second referendum on leaving the EU, Barr said.
The economic outlook is uncertain too. Some of the growth in early 2019 came from businesses stockpiling to protect themselves against a no-deal Brexit.
Carney did not sound in a rush to raise rates when he spoke in Washington earlier this month, hours after the Brexit delay.
But he highlighted how Brexit uncertainty had hammered business investment in Britain, which fell in every quarter last year for the first time since the financial crisis.
“This is starting to feed through to productivity statistics, and will have broader consequences,” he warned.
Weak productivity growth limits rises in living standards over the long term and can push up prices.
Inflation has been below the BoE’s 2 percent target for the past three months, but is likely to rise above target soon due to higher household energy bills.
The BoE is likely to increase slightly its growth and inflation forecasts on Thursday, giving scope for a more hawkish tone from Carney and other MPC members.
“There is at present less than a 30 percent probability of a 25 basis point rate hike priced in by the end of 2019, and we think the MPC will view this as too complacent,” UBS’s Wraith said.
(Reporting by David Milliken; Editing by Catherine Evans)