Slowing economy likely to ruffle Bank of England hawks' feathers

[May 08, 2017]  By Andy Bruce

LONDON (Reuters) - "Not yet" is likely to be the main message this week from Bank of England officials pondering when to start signaling an interest rate hike despite a sharp slowdown rekindling doubt about Britain's economy ahead of Brexit.

Most BoE rate-setters, who were wrong-footed by the resilience of Britain's consumers in 2016 following the European Union referendum shock, want more time to see how the economy copes before considering a change in record-low rates.

All economists taking part in a Reuters poll predicted there will be no deepening of the split within the ranks of the Monetary Policy Committee when it announces its interest rate decision on Thursday.

Increasing inflation, fueled by rising energy costs and the pound's post-Brexit vote plunge, has strained the BoE consensus recently and prompted some investors to speculate that a first rate hike in nearly a decade might come sooner than expected.

Michael Saunders, who left Citi to join the Monetary Policy Committee in August, hinted in April he might side with U.S. academic Kristin Forbes, so far the sole supporter on the MPC for raising rates from their current level of 0.25 percent.

That was before official data showed Britain's economy lost a lot of its momentum in the first three months of 2017 when it expanded at a quarterly pace of 0.3 percent, half the BoE's forecast.

Household spending, the economy's main driver, is starting to wilt as inflation pushes past the BoE's 2 percent target.

And while there are tentative signs that growth in exports might pick up some of the slack, opinions differ over how much.

The Reuters poll, however, suggests Forbes will remain in her minority of one, resulting in a 7-1 vote in favor of keeping rates at their record low.

The MPC is temporarily down to eight members following the resignation of Charlotte Hogg as BoE deputy governor after claims she overlooked a conflict of interest.

Economists also say the BoE is likely to trim its forecast for economic growth of 2.0 percent this year after the weak start to the year, even if some private-sector surveys have suggested a bit of a recovery in April.

Governor of the Bank of England Mark Carney delivers a speech at the International Fintech Conference in London, Britain April 12, 2017. REUTERS/Neil Hall/File Photo

TWISTS AND TURNS

Governor Mark Carney's words will be scrutinized for any shift in his views. In February he said Britain's economy faced "twists and turns" on its road to Brexit, suggesting he remained in no hurry to consider higher interest rates.

He will probably strike a similar tone this week.

"The key message is likely to be that all options are open. The Bank retains an implicit bias to hike, but is not in a great hurry to deliver," said Alan Clarke, head of European fixed income strategy at Scotiabank.

Sterling's recent appreciation -- which ought to help reduce inflation pressures in future -- has probably made it easier for Carney to push this view.

The pound has climbed above $1.29 since Prime Minister Theresa May called a national election for June 8, although foreign exchange strategists polled by Reuters expect it will slide back again toward $1.25 in the coming months.

The election itself will have little bearing on the BoE's new forecasts and Carney is likely to remind investors and the British public that the next move in rates is likely to be up.

Since February, Carney and his deputy Ben Broadbent have both highlighted the fact that the BoE's forecasts are based on a gradual increase in interest rates over the next few years - something that is not yet reflected in financial markets.

Carney could draw attention to this if the MPC has become uneasy about market expectations for interest rates, said JPMorgan economist Allan Monks.

"If there were a surprise next week, it could come along these lines. For example, the MPC might instead indicate more clearly that 'most members' agreed that a tightening in policy would be appropriate over the forecast horizon," he said.

(Editing by Jeremy Gaunt)

[© 2017 Thomson Reuters. All rights reserved.]

Copyright 2017 Reuters. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.