Will BOE hike Interest Rates in May?
The EY ITEM Club has released its latest economic forecasts. Given the current issues, it’s estimated that the UK market growth will slow this year, to 1.6% down from 1.7%. Even so, they are still expecting growth and they are mostly upbeat about the overall resilience of the economy. This year’s first quarter had a downward revision from 0.3% to 0.2% due to weather conditions and geopolitical concerns.
The Bank of England is likely to raise interest rates twice this year, with an 88% probability placed on a hike in May being discounted into the price. Recent dovish rhetoric from Governor Mark Carney, that a rate hike is likely this year but we shouldn’t get too caught up with the timing, leading to a significant correction in the sterling and the probability, of a rate hike in May, down to 55%.
The Gross Domestic Product data, released 27th of April, came in below estimates at 0.1% and will have a significant weight on the next interest rate decision. In response to this data, sterling continued the sell-off and a rate hike in May looks ever more unlikely. The MPC may now consider a rate hike in August or September.
Hiking rates, thus increase borrowing costs at a time, when the economy isn’t doing so well, would most likely stifle potential growth further down the road and limit business investments. Leaving rates as they are, leaves very little room if markets turn for the worse. It is imperative that Mark Carney addresses the process of raising interest rates.