Coming In From the Cold

Sterling’s Down; It Doesn’t Have to Be Out

A BOE rate increase in May looks a lot more unlikely – but don’t rule it out.

Photographer: Cole Burston/

Britain’s appalling winter weather has certainly made itself felt. The first estimate of gross domestic product for the first quarter was a sad 0.1 percent.

This sent sterling down a fair way versus the dollar – the Bank of England's May 10 policy decision makes a rate increase, which had been pretty well locked down a month ago, look pretty unlikely.

Quick Freeze

The pound sank after 1Q U.K. GDP data turned out worse than economists had forecast -- with The Beast From the East snowstorm partly to blame

Source: Bloomberg

Intraday times are displayed in ET.

The weighted probability of a 25 basis-point rise plummeted to around 25 percent.

From Dead Cert to Probably Not

The chances that the Bank of England raises raises next month are not all that far from zero

Source: Bloomberg WIRP function

A separate report on consumer confidence today was similarly miserable. You’d almost start to think that the central bank could never raise rates at any time this year.

Confounding Consumers

Confidence fell in April despite indications that the sqeeze on incomes is poised to ease

Source: GfK

The currency reaction makes sense. Still, the pound would be foolish to give up all hope.

Preliminary GDP is often subject to revisions, as less than half of the total data is available. This is why the BOE doesn’t include it in its models. And the numbers have form in turning out better: when similarly dire weather hit in the fourth quarter of 2010, the initial GDP estimate was minus 0.6 percent. That was subsequently revised to a final 0.1 percent reading. Quite a swing. 

And it’s far too soon to say the consumer has given up. The Asda Income Tracker for March showed that, for a second month, consumers’ weekly spending power rose from a year earlier. And with real income growth set to return, this could well be the nadir for U.K. shoppers. The recent bout of sunny weather will have helped by luring consumers into shops, particularly given that there is likely to have been some pent-up demand from February and March. 

Brass In Pocket

Family spending power is increasing once more

Source: Asda, Centre for Economics and Business Research

The Asda Income Tracker measures the amount of money that U.K. households have left each week after paying for essential items, including groceries, fuel, transport and housing.

Finally, the April Purchasing Manger Index reports will be published next week. These could well prove strong enough to suggest the impact of the storms was temporary. 

The Monetary Policy Committee was split at its last meeting. Its decision next month shouldn't be seen as a foregone conclusion. 

The pound needs concrete evidence of an entrenched slowdown before breaking below February’s low of $1.376.  

It’s a knotty issue for central bankers. But then that’s why Bank of England Governor Mark Carney gets paid the big bucks. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the authors of this story:
    Marcus Ashworth in London at mashworth4@bloomberg.net
    Andrea Felsted in London at afelsted@bloomberg.net

    To contact the editor responsible for this story:
    Jennifer Ryan at jryan13@bloomberg.net

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