The Bank of England will be meeting today for its monthly monetary policy review. Based on the economists poll, no changes to interest rates are expected, which remain at 0.25%, a historical low.
However, some institutions are not ruling out the scope for a rate hike today. This hawkish scenario comes from the fact that in the July MPC meeting, three officials voted in favor of a rate hike. Following the July meeting, BoE Governor Carney was also hawkish on the prospects of a rate hike.
This somewhat raises the odds of a rate hike, although by and large, the majority view is that the central bank will most likely stand pat on policy and rather use the forward guidance to prepare the markets.
Late last the week, the Bank of England warned banks and credit card companies about the increasing risk of reckless lending calling it a “spiral of complacency.” The central bank noted that there was a possibility of a return of the financial crisis that hit the UK and the global markets in 2008.
Alex Brazier, director for financial stability was quoted as saying that household debt can be “dangerous to borrowers, lenders and, most importantly from our perspective, everyone else in the economy.”
Brazier said that household incomes had increase by just 1.5%, but household debt surged 10%.
UK GDP rises 0.3% in Q2. Inflation eases in June
The UK economy managed to weather the Brexit referendum so far. In the latest report, the Office for National Statistics released the second quarter preliminary GDP report.
Data showed that the UK’s economy expanded at a pace of just 0.3% in the quarter ending June. This matched economists’ expectations. However, most of the gains in the economy came from the services sector, which managed to balance the contraction in the construction and manufacturing sector.
ONS head of the GDP report, Darren Morgan said that the UK’s economy saw a significant slowdown in the entire first half of the year. The second quarter growth was slightly higher compared to the first quarter. GDP expanded at a pace of just 0.2% in the three months ending March 2017.
On a year over year basis, the UK’s GDP slowed to 1.7%, down from 2% previously.
Inflation, which is the main point of discussion for the MPC members also eased. Data showed that headline consumer prices rose just 2.6% on the month in June. This was slower than the 2.9% increase that was noted in the month before. Core consumer price index also eased, rising just 2.4% in June. This was slower than 2.6% increase that came the month before.
BoE likely to stay on hold
With inflation showing signs of easing, the BoE MPC is likely to vote to keep the interest rates unchanged. However, the three dissenters who voted for a rate hike could continue doing so at today’s meeting.
Although no changes are expected, the BoE could keep up the pressure noting that interest rates will likely rise, rather than fall. For the markets, this could be a hawkish signal. But questions still remain as to when the tightening cycle; if it can be called so will start.
While the uncertainty on the timing of the BoE rate hike remains, the British pound is likely to see some volatility across the board. With the Brexit uncertainty, weak pace of wage growth, rising household debt, it would be a difficult task for officials at the Threadneedle Street to justify a rate hike.
