Weak GDP Slams Brakes on May Rate Rise

The UK economy grew at its slowest pace since 2012 in the first quarter of 2018, with the Beast from the East only partly to blame. It now looks unlikely the Bank of England will raise rates next month

David Brenchley 27 April, 2018 | 11:15AM

Mark Carney, Bank of England, interest rates, GDP, UK economy

A May interest rate rise now looks highly unlikely, after the UK economy saw its worst quarterly GDP figure, of 0.1%, since the fourth-quarter of 2012.

It wasn’t long ago that markets were pricing in a 90% chance of the Bank of England raising rates at its meeting next month. That probability reduced to around 50/50 after governor Mark Carney last week said recent “mixed data” meant he may not pull the trigger in May.

Now, the market reckons there’s a 25% chance the Bank rate will rise to 0.75% next month. Economists at Bank of America Merrill Lynch explain that it would be unusual for a central bank to hike rates with growth barely positive and inflation dropping fast. They reckon November is now more likely.

But Jacob Deppe, head of trading at online platform Infinox, doubts there will be one at all this year. “An interest rate hike in May now looks very much like a dead duck,” he claims.

“With wages rising by 2.8% in February and consumer price inflation falling to 2.5% in March, the MPC is under little pressure to hike rates until it has more data, particularly if inflation looks to be heading towards its 2% target.”

That said, the BAML economists caution against over-reacting to a preliminary GDP release, as there's always scope for the data to be revised upwards heavily.

Chilling Figures

Economists had expected a slowdown in growth, after the Beast from the East put the brakes on output in many sectors, including the key areas of construction and retail. But the figure pencilled in had been 0.3%.

“But what materialised was worse than feared,” says Ben Brettell, senior economist at Hargreaves Lansdown. He says the growth figure was "chilling", noting that it would have been worse without the offsetting boosts from energy supplies and online sales.

Nancy Curtin, chief investment officer at Close Brothers Asset Management, says the slowdown in growth will raise investors’ eyebrows. “The real concern for Mark Carney and the MPC will be how much of this slowdown is down to underlying and structural issues with the economy,” she explains.

The construction sector in particular was a big drag, slipping to its weakest growth level for six years. While the weather did have an impact, Blane Perrotton, managing director at surveyors Naismiths, says there continues to be a lack of confidence in the sector.

While Curtin says Brexit is clearly still a key reason for the UK lagging the global synchronised recovery, productivity is still a major worry. “Britain has endured the worst decade for productivity growth since the 18th century, and the failure to get out of this slump is a real worry,” she adds.

“Successfully increasing productivity will improve wage growth and spending, as well as business investment, and would be the catalyst to competitive growth.”

Until then, an interest rate rise looks off the cards. Sterling fell 0.86% against the US dollar on Friday morning; it’s now down 3.77% on the week. The pound also fell 0.68% against the euro, though it’s still gained 0.34% since last week.

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About Author David Brenchley

David Brenchley  is a Reporter for Morningstar.co.uk