BoE policymakers hint at Interest rates spring cut4 min read

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Interest rates set for spring cut as data backs up Bank of England fears that UK economy will need a boost in 2020

  • BoE’s Gertjan Vlieghe told the Financial Times he may vote for rate cut
  • GDP data from November 2019 worse than expected with a 0.3% drop
  • Figures show weak manufacturing sector has prompted decline

Interest rates look set to be cut in the spring as growth data today seemed to back up Bank of England fears that the UK economy will need a boost this year.

The economy went into a 0.3 per cent decline in November on the back of weakness in the manufacturing sector, according to official figures from the Office for National Statistics.

That data followed comments from Bank of England official Gertjan Vlieghe to the Financial Times that he would consider voting for a rate cut depending on how the economy has performed since the December election.

Three member of the Monetary Policy Committee have hinted they will vote for rate cuts should the UK economy continue to under perform

Three member of the Monetary Policy Committee have hinted they will vote for rate cuts should the UK economy continue to under perform 

Two Bank of England policymakers – Jonathan Haskel and Michael Saunders – have already voted for rate cuts at recent monetary policy committee meetings and the worse-than-expected GDP reading will only cement their positions.

Moreover outgoing Governor Mark Carney and MPC member Silvana Tenreyro, have voiced their intention to vote for rate cuts should the UK economy continue to under perform. 

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In a speech on Thursday, Mark Carney said he was prepared to take ‘prompt’ action if the economy remained sluggish. 

Carney said: ‘With the relatively limited space to cut Bank rate, if evidence builds that the weakness in activity could persist, risk management considerations would favour a relatively prompt response.’

Silvana Tenreyro said:  ‘If uncertainty over the future trading arrangement or subdued global growth continue to weigh on demand, then my inclination is towards voting for a cut in Bank rate in the near term.’

All three committee members of the Monetary Policy Committee qualified their comments stating they would need to see more data before making a decision.

Last November, two other members of the committee, Jonathan Haskell and Michael Saunders, voted to cut rates. 

Another decision is due on 30 January.

The disappointing November dip in GDP  came after growth in September and October, which meant the economy stil grew over the three-month period from September to November inclusive. 

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Output in the manufacturing sector fell 1.7 per cent in November according to the ONS figures. 

The under performance of the manufacturing sector was offset by a growth in construction with output increasing by 1.9 per cent during November after a 2.2 per cent decline was reported a month earlier. 

Rob Kent-Smith, head of GDP at the ONS, said: ‘Overall, the economy grew slightly in the latest three months, with growth in construction pulled back by weakening services and another lacklustre performance from manufacturing.

‘The UK economy grew slightly more strongly in September and October than was previously estimated, with later data painting a healthier picture.

He added: ‘Long term, the economy continues to slow, with growth in the economy compared to the same time last year at its lowest since the spring of 2012.’ 

The services sector also reported a decline, although notably more modest, at 0.3 per cent for the month. 

Chris Williamson, chief business economist at IHS Markit, said: ‘The latest GDP data adds to signs that the UK economy stagnated at best in the fourth quarter of last year as heightened political uncertainty, Brexit risks and weaker global demand all colluded to dampen spending by both business and households.

‘The good news is that all these headwinds are showing signs of moderating, if not even turning into tailwinds, as we move into 2020. However, downside risks remain elevated.’   

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Robert Alster, Head of Investment Services at Close Brothers Asset Management said: ‘Greater clarity around the future relationship is expected to help the somewhat weak economy. 

‘The Bank of England forecasts a meaningful recovery in business investment, as companies benefit from greater certainty. Meanwhile, an improvement in consumer confidence could also translate into an increase in spending.’

He added: ‘We can see that this has already been anticipated in the share price moves of the house builders and airlines.

‘It’s still early days and, if today’s weak data persists, a base rate cut may be deemed necessary further down the line. We expect the tone of negotiations to determine the evolution of business and consumer sentiment.’

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