Bank of England’s latest rate hike under microscope after UK GDP data released
The Bank raised interest rates for only the second time in a decade last week.
The rebound in second-quarter UK growth was in line with Bank of England forecasts, but economists have raised questions over whether last week’s rate hike was justified.
While figures showed GDP rising 0.4%, economic expansion appeared to sputter in the final month of the quarter, growing just 0.1% in June.
“The second-quarter rebound was in line with expectations from the Bank of England, which raised interest rates for the second time in ten months at its August meeting,” said Chris Williamson, chief business economist at IHS Markit.
“Barring surprises, the Bank sees the economy growing at a steady 0.4% rate in coming quarters, but there are already signs that the third quarter has started on a softer footing,” he added.
He noted that recent purchasing managers’ index (PMI) readings covering the services, manufacturing and construction sectors are pointing to third quarter growth of just 0.3%.
“Not only did the PMI lose ground in July, but recent inflation indicators have fallen, hence fueling criticism that it may have been more appropriate to postpone a rate hike when genuine signs of the economy strengthening had appeared, rather than just a rebound from extreme weather,” he said.
But Howard Archer, chief economic adviser to the EY Item Club, said the reading “will likely be of considerable relief to the Bank of England”, as a weaker outcome would have fuelled criticism of the rate-setting Monetary Policy Committee (MPC).
“The Bank of England will likely see confirmation the economy grew 0.4% quarter on quarter and is back growing essentially in line with its perceived supply-side annual potential growth rate of 1.5% as consistent with its decision to raise interest rates from 0.50% to 0.75%.”
Mr Archer expects the Bank to wait until after the Brexit deadline of March 2019 to hike rates further, “given the major uncertainties that may occur in the run-up to the UK’s departure”.
The Bank of England currently expects full-year growth for 2018 to come in at 1.4%, rising to 1.8% in 2019.
“We expect the Bank of England to next raise interest rates from 0.75% to 1.00% in May 2019,” Mr Archer said.
“We would not rule out a second 25 basis points interest rate hike towards the end of 2019 as the Bank of England looks to gradually normalise monetary policy.
“However, the growth and interest rate forecasts could be blown out of the water if the UK leaves the EU next March with no deal.”
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