With Mark Carney due to host his last meeting at the Bank of England, on January 30, the burning question on many market makers' minds is whether he will present a 25bp rate cut (to 0.50%) as his parting gift before he passes the baton onto Andrew Bailey in March. Bearing in mind that a cut will bring the central bank more in-line with the Fed and BoE tightening paths, through last year. At the December BoE meeting, there were two dissenters, out of the nine voters. This month two other voters, namely Silvana Tenreyro and Jan Vlieghe, have said they would support a cut in the near-term, following weaker than expected UK data.
Recent data releases have pointed to some economic weakness, with the likes of disappointing manufacturing and industrial production readings in November, and the 0.3%mom fall in GDP, again in November. Moreover, inflation fell to 1.3% in December, from 1.5% previously. The UK’s inflation rate is now the lowest since November 2016; predominantly driven by lower women's apparel and hotel room costs. The concern, however, is that this data is broadly focused on a period of political uncertainty; ahead of the mid-December 2019 general election.
Therefore, the other suggestion is for the Bank of England to hold pat, allowing time for assessment of the post-election activity, corporate spending plans and upcoming consumer and business surveys; which have shown signs of post-election improvement. The most recent housing market data has surprised the upside with a pick-up in sales and price expectations. Moreover, UK unemployment is at all-time lows. We look to the UK retail sales numbers due tomorrow morning for more clues. Market expectations are for 0.8% mom and 3%yoy growth in the ex-auto and fuel reading; this does however follow dire November readings.
So, many would support the idea of holding BoE rates until there is a more compelling justification for a cut. There are many reasons why, including the fact that we are seeing a stabilisation in global growth, although still depressed and patchy, we expect a sluggish uptick in the second half of the year. We also need to consider the effects of the Brexit deal, currently sat at the House of Lords, and whether it will boost consumer and business sentiment. PM Johnson’s fiscal plans, to be firmed up at the budget in March, may also lend support to overall sentiment and eventually growth. Importantly, if the BoE does cut to 0.5% it will have very limited room to move if we do see a major downturn, as global risks do still remain to the downside. Either way, markets are currently pricing in a ~64% chance of a cut.