Bank of England signals rate hike only in 2018: Growth forecasts lowered

In what could be signs of a sluggish close to the second quarter GDP, the latest manufacturing, construction and industrial production numbers painted a grim picture on the economy.

Manufacturing activity in the UK stagnated in June led by a decline in vehicle production which fell 6.7%, marking the biggest decline since 2013, data from the UK’s Office for National Statistics (ONS) showed on Thursday.

The construction sector was also weak, posting a decline of 0.1%. Economists polled were expecting construction output to rise 1.4%. Data for the previous month was revised however to show a 0.4% decline compared to the initial estimates of 1.2% decline.

The industrial production was the only bright spot. Data showed that industrial output rose 0.5% on the month, rising more than the forecasts of 0.1% increase. Previous month’s data was also revised to show a flat reading for the month compared to the initial estimates of a 0.1% decline.

The little gains from the manufacturing and industrial production came mostly on account of the oil and gas industry. Combined, industrial production was seen falling 0.4% for the whole of the second quarter.

Bank of England signals rate hike only in 2018

The Bank of England’s monetary policy meeting held last week threw a surprise. Despite coming off hawkish, the central bank said that interest rates will have to rise given the damage to economic growth on account of Brexit and with inflation staying firmly above the central bank’s 2% inflation target.

“If the economy were to follow a path broadly consistent with the August central projection, then monetary policy could need to be tightened by a somewhat greater extent over the forecast period than the path implied by the yield curve underlying the August projections,” the central bank said in its statement.

The central bank however maintained its narrative that rate hikes will be gradual and limited. The central bank projected two rate hikes in 2018. Economists are now contemplating when the first rate hike will come.

The British pound had enjoyed a strong rally previously on anticipation that rates will rise. However, with the central bank now making it clear that rate hikes are still a far way off, the earliest estimates for the first rate hike is expected only in Q2 of 2018, if not later.

At the BoE’s monetary policy meeting, officials voted 6 – 2 to keep interest rates unchanged. This was a slight change from the previous meeting where MPC members voted 5 – 3.

The central bank said that inflation could peak 3% by October this year and noted that most of the economic growth was not driven by consumer borrowing. UK’s wages continued to remain flat and are yet to catch up with inflation.

UK economic growth forecasts lowered

The Bank of England’s minutes showed that economic growth forecasts were also downgraded. According to the new estimates, the UK’s annual GDP growth rate is expected to rise only 1.6%. This was lower than the previous estimates of 1.7%.

Few weeks ago, the UK’s Office for National Statistics (ONS) released the preliminary GDP report. The data showed that UK’s economy rose 0.3% in the quarter ending June 2017. This was a slight improvement from the 0.2% GDP growth that was registered in the previous quarter.

On a year over year basis, UK’s annual GDP growth rate was at 1.7% in the quarter ending June 2017.

The British pound has managed to post a modest recovery after falling to multi-decade lows since the June 2016 Brexit vote. The GBPUSD currency pair, commonly referred to as the cable has managed to recover, rising above $1.30.

On Thursday, the National Institute of Economic and Social Research showed that growth in the UK slowed to 0.2% during the three months through July. The GDP forecasts, combined with the BoE’s forward guidance on growth potentially suggests that the UK’s economic activity could continue to slow in the coming months.

By John Benjamin, Orbex

John has over 8 years of experience specializing in the currency markets, tracking the macroeconomic and geopolitical developments shaping the financial markets. John applies a mix of fundamental and technical analysis and has a special interest in inter-market analysis and global politics.

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