Is UK Data Really So Important if a Rate Hike is So Priced in?
The UK will release a variety of important economic reports over the coming days which, despite the multiple distractions elsewhere, will attract the attention of traders.
With the next Bank of England meeting a little over three weeks away, the data over the coming days could play a big part in whether the central bank raises interest rates or not.
Policy makers in recent months have strongly hinted at a rate hike in the coming months and specified in the minutes from the March meeting that the May economic forecasts will allow the MPC to assess the underlying momentum and extent of price pressures.
It’s not unusual for central banks to announce policy changes alongside new economic forecasts as it gives them the opportunity to explain the move alongside fresh data. While this isn’t necessary and may become less common later on, it is useful in the early stages of a tightening cycle.
Two policy makers – Ian McCafferty and Michael Saunders – voted for a hike at the last meeting, a move which some believe signals – undoubtedly intentionally – that others will shortly follow, a pre-rate hike wink if you will.
So if this is almost a foregone conclusion, then why is the data so important?
The simple answer is it isn’t a foregone conclusion but it is a strong possibility. There is a credibility issue at stake and so if the BoE doesn’t raise rates after strongly hinting at doing so, it needs a very good reason. But the data over the coming days could provide just that.
The most obvious of these is the inflation data, with the central bank having repeatedly cited this when building expectations and raising rates last November. Expectations are for this to fall to 2.6% on Wednesday and remain at 2.4% on a core basis. Does this really warrant a rate hike? Especially given the current path of both and the uncertainty in the economy associated with Brexit. And what if the actual data is below forecasts?
Then there’s the labour market figures. Granted, unemployment is at a 43-year low and employment an all-time high. But this doesn’t necessarily translate to higher wages and inflation as we’ve seen in the US. Wages are expected to accelerate once again which hawkish policy makers will point to as evidence of a tight labour market.
UK Unemployment Rate
I remain unconvinced on this and wonder how much of this is a temporary rise in wages in response to the rise in living costs that are unlikely to become the norm. Still, any figures in line will certainly comfort those intending to vote for a rate hike in a few weeks. The national living and minimum wages also rose in April and could contribute to the upside pressures.
Finally we have the retail sales data on Thursday. Consumer spending has been on the decline since late 2016 which has unsurprisingly coincided with the decline in real incomes which culminated in around 12 months of zero or negative real wage growth (inflation higher than income growth). The UK posted its first rise in this figure in February since January last year.
UK Real Incomes vs Retail Sales
Source – Thomson Reuters Eikon
With real incomes rising as inflation falls and wages pick up, retail sales could follow although there may be a lag if consumers have accumulated debt during the period of negative real wage growth. Still, a 2% increase in annual core sales and 1.1% in overall may convince policy makers that consumer sentiment remains in a good position despite the last year.
What does all this mean?
With the pound having performed well over the last couple of weeks, it’s clear that traders are becoming increasingly confident interest rates are about to rise above 0.5% for the first time since March 2009.
In fact, it is the seventh session in a row (at the time of writing) that the pound has made gains against the US currency. The strong run means that, among the G10 group of rich nations, the UK is the best-performing currency this year.
UK Pound Sterling Currency Index (BoE)
Source – Thomson Reuters Eikon
There is a strong likelihood that the BoE will do just that given the recent commentary. In fact, markets currently have a rate hike around 73% priced in. The data in the coming days could further solidify this or cast doubt on it depending on what’s reported.
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