The Bank of England looks set to keep interest rates on ice this week, capping a sharp swing in the outlook for the British central bank, which might now struggle to convince investors that it will raise borrowing costs at all this year.
Unexpectedly weak economic data and cautious remarks from Governor Mark Carney have dashed what looked like near-certain expectations of a rate increase until a few weeks ago.
Since he joined the BoE in 2013, Carney has signalled several times that rates were likely to rise, only for economic data to go the wrong way, according to a Reuters report Sunday.
With the prospects for Britain’s economy unclear and the terms of Britain’s departure from the European Union far from settled, Carney is likely to want to hedge his bets on Thursday.
The biggest challenge will be to keep the prospect of a further rate rise this year credible in the eyes of investors, who feel wrong-footed by a slowdown in the economy that may well prove temporary and by the BoE’s shifting guidance.
Sterling fell to its lowest since January against the US dollar on Friday as markets priced diverging prospects for growth and interest rates on the two sides of the Atlantic.
“Resetting communication after sitting out a rate hike will be an uphill task for the Monetary Policy Committee,” Barclays economists Fabrice Montagne and Sreekala Kochugovindan said in a note to clients.
“It will have to make a convincing case that softness in Q1... is transitory,” they said. “Markets will likely be reluctant to adhere to the MPC’s rhetoric given the abrupt change in course witnessed shortly ahead of the May meeting.”
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