Rate cut 'unlikely' as economic data improves

Rate cut 'unlikely' as economic data improves

The Bank of England is unlikely to cut interest rates this month after economic data showed growth was potentially at a 16-month high, according to Melanie Baker, senior economist at Royal London Asset Management. 

The central bank is scheduled to decide on Thursday (30 January) whether to cut interest rates.

The purchasing managers index (PMI) survey for January, released last week, showed activity in the services sector expanded sharply, while there was also improvement in the manufacturing sector. 

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The composite measure averaging out across all of the various sectors of the economy, indicated that growth was at its highest level for 16 months.

Ms Baker said: “The composite UK PMI Flash data would suggest we are unlikely to see a rate cut from the Bank of England.

“After a business survey jump like this and with optimism higher, why not wait a bit longer to see how things play out? PMIs are not the ‘be all and end all’ for the Bank of England. Conversations between their agents and businesses this month will give them a much more nuanced picture on the issue of Brexit-related uncertainties in particular.”

The PMI data came in the wake of other positive economic news last week, according to Mick Gilligan, head of fund research at wealth manager Killik and Co. 

In a note to clients last week he said: “Economic data released this week on the UK economy were generally strong. House prices, according to Rightmove, picked up in January, rising 2.3 per cent month-on-month, following a 0.9 per cent decline in December. Prices rose 2.7 per cent year-on-year.

"The employment market remains robust, with the unemployment rate unchanged at 3.8 per cent in November, in line with expectations. The change in the number of people in employment, however, was higher than forecast, with the 208,000 increase taking the UK’s employment rate to a new high of 76.3 per cent according to the Office for National Statistics.

"In the three months to the end of November, average weekly earnings, excluding bonuses, rose 3.2 per cent compared to the same period one year ago, slightly above expectations."

Samuel Tombs, chief UK economist at Pantheon, said the current level of economic activity in the UK was “far above” the level at which the UK typically cuts interest rates. 

The PMI data came in light of several members of the Bank of England's Monetary Policy Committee (MPC) stating that a rate cut might be needed.

Nick Wall, who manages the Merian Global Investors Strategic Absolute Return Bond fund, said he thinks the Bank of England will cut interest rates on Thursday as a way to manage the risks in the economy.

He said with interest rates already near record low levels, the central bank has little ammunition to fight an economic downturn, and may feel it is more effective to use the little ammunition it has right now, rather than wait and risk the economic outlook deteriorating later, when, in his view, an interest rate cut may not prove as effective.