Market Insight - June/July 2018
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Economy

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On hold

The Bank of England voted to hold the base level of interest at 0.5% in May. This wasn’t surprising given the deluge of weak economic data that was announced in the weeks preceding the vote. But it was enough to change the policymaker’s minds from raising interest rates – which it had been rumoured they would – to holding tight and staying put.

Two out of the nine Monetary Policy Committee (MPC) Members voted for an interest rate rise in May, unchanged from their last vote. It appears the remaining MPC members are happy to adopt a more cautious ‘wait and see’ approach until they see firmer signs that the economy is gaining momentum.

The news of wage growth picking up lured markets into thinking that a rate rise in May was a sure thing. But the weeks following revealed less promising signs that the economy was set to grow.

Manufacturing, construction and retail sales all felt the pain of squeezed household incomes and saw weak growth. Inflation slowed to 2.5% in February, which was much lower than expected and the demand for credit fell too.

But the final straw was the latest GDP figures which showed that UK economic growth rose a meagre 0.1% between Q4 2017 and Q1 2018 – the weakest growth in over five years and much lower than the 0.3% expected.

As the May vote passed, August looks like the month when the MPC are most likely to raise the cost of borrowing. Markets are signalling a 40% chance of an interest rate hike in August.

May’s Super Thursday also saw the Bank downgrade its forecasts for economic growth in the UK from 1.8% to 1.4% this year. On the plus side, inflation is expected to fall quicker than originally thought, reaching its 2% target by 2020. And even though real income growth is expected to remain subdued, higher levels of investment and exports should help give the economy a bit of a boost. 

 

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