Will interest rates be cut? Bank of England faces tight call as Mark Carney’s final meeting debates the post-election economic bounce
- Bank of England governor Mark Carney to hold final rates meeting on Thursday
- Economists are split on whether rates will be held at 0.75% or cut to 0.5%
- A surprisingly strong set of economic data last week may stop a cut
After more than six years in the hot seat Bank of England Governor Mark Carney will hold his final interest rate meeting tomorrow.
Intriguingly, the first one of the decade and under the new Parliament has become a rare beast – one where the outcome isn’t known beforehand.
Economists and forecasters of various stripes are split on whether we will see rates held at 0.75 per cent or cut to 0.5 per cent.
Bank of England governor Mark Carney is departing the Bank of England after six years
Until last week a cut looked to be on the cards, with Carney himself hinting strongly that the slowdown in the economy brought about by the protracted Brexit wrangling and related General Election meant a boost was needed.
Then came a surprisingly strong set of economic data, suggesting the removal of uncertainty over Brexit and the ending of Jeremy Corbyn’s aspirations of gaining power were enough for things to get back on track.
The ‘PMI’s’ – or purchasing managers indexes – are a measure of various activities undertaken by a wide range of businesses across sectors, such as buying-in stock and taking orders onto their books from customers.
They are one of the most closely watched of all economic updates in the City, largely because they tell us something about where the economy is heading rather than just where it has been.
The latest batch were some of the punchiest seen for years, which seriously undermines the case for cutting rates to stimulate the economy.
The argument against a cut centres on the fact that an early cut when the economy doesn’t strictly need one could stoke inflation and use up ammunition that might be needed at a later date.
This is particularly the case when the rate is already close to rock bottom, as it is now.
A cut also further punishes savers of course, who have been starved of any real returns on their cash for many years now.
In favour of a cut is the argument that the PMI’s do not provide enough certainty yet that the economy is on the up, and if they turn out to be a blip which is not repeated a rate cut later in the year could come too late to be effective.
Kevin Doran, chief investment officer at AJ Bell, noted: ‘Whether the anecdotal evidence of the ‘Boris bounce’ and encouraging flash PMI data is strong enough to out-do slower retail sales and sluggish economic growth remains to be seen, but with Mr Carney likely to practically abstain in his last committee meeting, it’s hard to see enough members crossing the lobby to bring rates down this month.’
This week’s rates meeting is the first since Boris Johnson won December’s General Election
‘The fact that such fine margins are being discussed demonstrates just how addicted the UK economy has become to easy money since the financial crisis,’ he continued.
‘A world where composite PMIs are above 50, unemployment is at generational lows and asset prices at all-time highs hardly seems like the backdrop to lowering rates, but who knows?’
‘When you get too close to the Earth, it can look flat. Maybe the MPC members have their ears just a little too close to the ground.’
James Smith, developed markets economist at ING, is forecasting a hold, with four of the MPC members at most voting for a cut.
‘It’s a close call, but a recent post-election pick up in sentiment should be enough to see the Bank of England avoid cutting interest rates this month, he said.
Stefan Koopman, senior market economist at Rabobank on the other hand, is leaning towards there being a cut. He said: ‘We have been flagging the risk of Bank of England rate cuts in 2020 since late-summer.
‘In our view, global growth will remain sluggish and we don’t expect the uncertainties regarding the UK’s future possible trading relationships to abate anytime soon.’