U.K. Rate Cut? 10% Risk for Economists at Odds With Markets

  • Survey shows high hurdle for Bank of England to cut key rate
  • Data due this week on inflation, wages, jobs and retail sales

Mark Carney has the backing of economists when he insists the next move in U.K. interest rates is more likely to be up than down.

There’s only a 10 percent chance the Bank of England chief and his officials will cut the benchmark rate from its record-low 0.5 percent, according to Bloomberg’s monthly survey of economists. It’s a stand squarely at odds with interest-rate futures markets, which are pricing a more than 60 percent possibility.

Differences in focus may help explain the gap. Economists looking at domestic data and the BOE’s latest jawboning predict a rate increase will come in the fourth quarter of this year. Investors -- close to panic mode amid international financial-market turmoil -- are all but ruling out a hike for the next two years and are zeroing in on the case for a cut. This week’s slew of U.K. data on prices and wages may help narrow the divide.

“The concerns that are driving this are very difficult to forecast and aren’t centered on our home turf,” said Ross Walker, an economist at Royal Bank of Scotland Group Plc in London. “The market pricing does look extreme, but I wouldn’t be too dismissive about the way the risks are balanced. The BOE’s hurdle for a rate cut is high at the moment because they’d need to see clearer evidence of a deterioration in the activity data.”

Only two of the 31 economists surveyed -- Jane Foley at Rabobank and Aurel BGC’s Jean-Louis Mourier -- put the odds of the BOE lowering rates at more than 50 percent. Three said there is no chance.

No Recession

Official statistics point to a slowdown but not another recession as cheap borrowing costs and record employment keep consumers spending. Weaker-than-forecast industrial production data last week underscored doubts about the global outlook.

Policy makers -- who have kept the key rate unchanged since 2009 -- see a darkening international picture offsetting resilient domestic growth and have signaled a willingness to keep policy loose until cost pressures in the economy start to build. A report Tuesday is forecast to show inflation edged up to 0.3 percent in January, still well below the central bank’s 2 percent target.

Further clues will come on Wednesday, when labor-market data are released. BOE Deputy Governor Ben Broadbent has said there are some signs weak inflation is holding back pay settlements. A BOE staff blog on Monday said low inflation has dulled the response of pay to increased recruitment difficulties. Earnings growth excluding bonuses probably slowed to 1.8 percent in the fourth quarter, the weakest pace in almost a year, according to a Bloomberg survey.

‘Meaningful Risk’

“The BOE is very conscious as we go into the spring wage round that we may have some form of wage pause” in response to very low inflation, said Bill O’Neill, head of the U.K. investment office at UBS Wealth Management. “If there was a second-round effect coming through -- if there was evidence of that -- I think there would be a response. We don’t think that would occur, but clearly there is a meaningful risk.”

The Chartered Institute of Personnel and Development said Monday its survey of more than 1,000 employers and human-resources professionals showed a rising proportion of firms feel no compulsion to match or raise their previous pay awards as low inflation is boosting real wages.

Signs of a tightening labor market will probably be on display elsewhere, with Wednesday’s figures forecast to show unemployment falling to 5 percent, the lowest rate in more than a decade. A separate release on Friday is predicted to show retail sales rebounding in January.

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