Solid UK growth pushes BoE rate cut off the table for now

October 27, 2016

A man cleans the tables of a beer garden on a sunny day in Munich's English garden 'Englischer Garten' March 16, 2012.   REUTERS/Michaela Rehle (GERMANY - Tags: ENVIRONMENT SOCIETY) - RTR2ZFPN

The likelihood the Bank of England cuts interest rates again on Nov 3 has been pretty much pushed off the table by official data showing the British economy has so far defied fears of a hit from Britain’s June 23 vote to leave the European Union.

A Reuters poll earlier this week had already predicted the central bank would stand pat next month, with only around a quarter of the 60 economists surveyed predicting a cut to Bank Rate, already at a record low of 0.25 percent.

Following Tuesday’s third quarter GDP numbers, which showed the economy expanded a much better than expected 0.5 percent last quarter, some of those economists have started changing their minds.

“Today’s data neatly summarise that there is no great urgency to increase stimulus, and we do not consider that a majority in favour of easing will coalesce at next week’s MPC meeting,” Lloyds Bank told clients.

Daniel Vernazza at UniCredit said something similar:
“The much better than expected print for 3Q GDP growth effectively removes the chance that the BoE will cut interest rates at its meeting next week.”

Chances of a November cut were already declining – in a Reuters poll taken ahead of the September meeting, 46 of 59 respondents had a cut pencilled in for Q4. Thirty-nine of those called out the November meeting specifically.

But that number came down in the latest poll to 17 predicting a cut at the November 3 meeting, a minority in the overall sample of 60 respondents.

The likelihood of a cut in November has also gone down to 35 percent in the latest poll from 55 percent in the September survey. Financial markets are pricing in a much lower chance of that happening.

But not everyone was convinced solid growth in Q3 was enough to stop the Monetary Policy Committee from cutting.

“RBC still forecasts a cut in Bank Rate at the November MPC meeting from 0.25 percent to 0.10 percent. We accept the decision isn’t clear-cut though and subtle shifts in judgement by certain MPC members could cut both ways,” said Sam Hill at RBC.

Economists at Credit Suisse, while expecting no rate cut next week, also warned the strength would not last.

Even though Q3 GDP surprised to the upside, the details reveal that the strength was driven by the domestic services sector. This is at risk in the future as the weak pound is likely to contribute to rising prices and squeeze real wage growth and consumer spending. Moreover there are no signs of the weaker currency boosting manufacturing so far, with prices of exported sterling-priced goods actually rising. In our view the outlook for 2017 growth is still subdued. 

– With reporting by Sumanta Dey

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