Slowdown in growth sinks prospect of May rate rise

Analysts predict rates will be held until late summer after GDP edged just 0.1pc higher in the first quarter

THE Bank of England will not hike interest rates next month, analysts believe, cancelling a long-anticipated increase because of a slump in economic growth.

Mortgage costs will stay down as a result, supporting household finances and helping hard-pressed businesses, though savers will also have to wait longer for a better return on their cash.

Britain’s economy ground to a halt in the first three months of the year as bad weather piled woes on top of squeezed household finances and a troubled construction industry.

GDP growth plunged to just 0.1pc in the first quarter, the Office for National Statistics said, slowing down from 0.4pc in the final quarter of 2017 to its weakest pace since late 2012.

The Bank of England had anticipated a smaller slowdown, last month cutting its forecast to 0.3pc after the icy blast from the “Beast from the East”.

But now Governor Mark Carney and colleagues have to judge whether or not this more severe crunch will have a longer-term effect on the economy.

Economists at UBS believe the Bank will not raise interest rates at all this year. Natwest analysts expect one rate increase in August and no more for the foreseeable future.

Markets overall have pushed back their expectations of a hike to September. “A May rate hike would be a tough sell. It now looks more likely than not that the Bank will opt to wait until August to buy more time to see how things evolve,” said James Smith at ING.

Markets were almost certain the base rate would rise from 0.5pc to 0.75pc, until Mr Carney last week indicated that “mixed data” could delay the increase.

The fall in growth sent the pound tumbling against all of its G10 currency rivals, sinking as much as 1.3pc to $1.3756 against the dollar, a 12-week low. Disappointing French GDP numbers mitigated its 0.7pc fall against the euro, leaving it hovering around the €1.14 mark.

Since Mr Carney first hinted that the Bank will hold fire on a May hike last week, sterling has tumbled 3.2pc against the strengthening dollar.

Inflation is on the way down, which reduces pressure on the Bank to raise rates. That should also improve prospects for economic growth over the rest of 2018. Prices increased by more than wages over much of the past year, putting pressure on family finances, hitting spending and so harming the economy.

Wages are now outpacing prices once more, however, which should encourage a rebound in the growth rate.

“Much of the activity lost to the bad weather in the first quarter should eventually be made up,” said Howard Archer, chief economic adviser to the EY Item Club, predicting growth will reach 0.5pc in the second quarter.

The first quarter was particularly brutal for the construction sector. Its output fell by 3.3pc, with this down in every month – not just at the end of February and in early March, which had the worst of the weather. Manufacturing slowed to grow by 0.2pc.

The “Beast from the East” hit hotels and restaurants, damaging the dominant services sector, which expanded by a sluggish 0.3pc – though the ONS found little evidence of the snow causing the slowdown in the wider industry. Production industries rose by a more impressive 0.7pc, as the oil and gas sector rebounded from pipeline closures late last year, and families turned up the heating.

GDP per head fell by 0.1pc, the first drop in two years.