More disappointing data sees rate rise prospect recede again

Comment Martin Flanagan

The pendulum on interest rate policy swung stubbornly back yesterday towards the Bank of England (BOE) staying its hand on what would be the first tightening of monetary policy in ten years. The reason was official economic data showing that output in the manufacturing and construction sectors – together about one-fifth of UK GDP – fell in May.

Compounding the effect, the UK’S trade deficit widened in that month. On currency markets, the combined negative effect on sentiment sent sterling down 0.7 per cent. The pound was also not done any favours by better-than-expected job figures in the US, which firmed the dollar. Oxymoronic, yes, but momentum is clearly building for Bank of England governor Mark Carney and colleagues to do nothing.

The latest data from the Office for National Statistics follows recent unofficial, yet pretty authoritative, surveys showing that the weakness in manufacturing and construction also continued in June. Earlier this week our key services sector, accounting easily for the bulk of the UK economy, also highlighted slowing new growth last month reflecting the weakest rise in new work since last September.

Business optimisim in the sector fell to its second lowest since December 2011. Taken together, you can see why the Bank would be minded to keep interest rates on hold.

It is a reality check after sentiment at the Bank seemed to be moving towards a rate rise as inflation has surged to 2.9 per cent.

The fluttering in the dovecotes of the Bank’s monetary policy committee (MPC) was amply demonstrated by the hawks garnering three votes for such a monetary tightening at the June meeting.

Carney seemed to fluctuate – not for the first time – between suggesting consideration of a rate rise was moving centre stage, only to then suggest in a speech that a rate rise now would be premature when business investment was not taking up the slack of squeezed average earnings growth.

The best news this week has been Scotland avoiding recession in the first quarter of 2017. But the wider UK economic canvas still looks an impressionistic painting rather than a portrait, with finelybalanced arguments either way.

My bet? No rate rise until 2018.