What do today’s GDP figures mean for UK interest rates?
The Bank of England looks set to delay another bout of emergency stimulus next week after this morning’s strong GDP figures.
The Office for National Statistics (ONS) said the UK grew by a robust 0.5 per cent this morning, defying already-revised expectations of a 0.3 per cent gain in the first three months after the referendum.
Few can deny that, so far, the economy has convincingly shaken off any post-Brexit blues with consumers carrying on spending and growth still coming through.
For Threadneedle Street, that means a significantly reduced probability they will need to slash interest rates this year to prop up the economy and stave off a recession.
Most economists were convinced the Bank will not follow up August’s bumper stimulus package, which saw interest rates taken to a new record low of 0.25 per cent and £70bn of quantitative easing unleashed.
Markets' UK rate expectations have risen significantly since August Inflation Report, but note path still lower than on eve of referendum. pic.twitter.com/LEJSmOAg3g
— Capital Economics UK (@CapEconUK) October 27, 2016
“Given stronger resilience in economic activity post-referendum than anticipated, we believe the Bank of England will stay put in November,” said Barclays’ economics team.
Nevertheless, Mark Carney is expected to keep his powder dry, with the possibility of another fire-fighting mission needed in 2017 after Theresa May triggers Article 50.
Kallum Pickering, UK economist at Berenberg said: “The better than expected near-term performance is likely to keep the Bank of England on hold for now. However, if the economy weakened over the coming quarters, we would expect the Bank to ease monetary policy again.”
Read more: Is this the UK's "true" interest rate?
KPMG’s head of macroeconomics, Yael Selfin agreed the Bank should keep some of its limited options in reserve: “The Bank of England should refrain from cutting rates further next week, and save the scarce ammunition it has left for potentially harder times ahead. May 2017 now looks like the earliest time to cut rates further, providing some boost to the economy after Article 50 is triggered.”
Market watchers won’t have to wait long to find out what the Bank is thinking. The rate-setting monetary policy committee (MPC) votes on what to do with interest rates next Thursday, alongside publishing its latest forecasts on growth and prices in its market-moving quarterly Inflation Report.
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