After more than a decade when the outlook for interest rates was dominated by an assessment of the impact of first, the global financial and eurozone crises, and more recently Brexit, traders are once again getting used to the need to closely analyse the economic data and comments by central bankers.
Since the Bank of England cut rates to 0.5 per cent in March 2009, its monetary policy committee (MPC) only changed the Bank Rate three times since then as the £435bn of quantitative easing did the heavy lifting involved in stimulating the economy. To put that in context, the previous decade saw an average of four rate changes a year.
But a flurry of economic data and a series of speeches by members of the nine-strong MPC over the past week have left economists in a quandary over whether the MPC will hold firm at 0.75 per cent or order a cut. “The decision is on a knife edge,” said Ruth Gregory, senior UK economist at Capital Economics after official inflation figures were published.
That showed annual inflation had dropped to 1.3 per cent in December from 1.5 per cent in November and further below the 2.0 per cent figures that the Bank is mandated to target two years hence.
It followed official data for economic growth in November that showed the overall economy shrank by 0.3 per cent in November to leave the rolling three-month growth rate at just 0.1 per cent.
Retail sales volumes fell 0.6 per cent month-on-month in December after an 0.8 per cent monthly drop in November. That was the fifth consecutive month of no growth, a phenomenon unseen since the 1970s.
At the start of the month the snapshot surveys of activity in December showed services flat, a contraction in construction and a seven-year record decline in manufacturing.
The value of sterling fell on the foreign exchange markets as traders bet on the odds of a cut in the Bank Rate to 0.5 per cent or even lower.
This frenzy was fuelled by a series of speeches by MPC members. Bank governor Mark Carney said that evidence of persistent weakness in activity would favour a “relatively prompt response”.
His colleague of the MPC Silvana Tenreyro said her “inclination” was to respond with a rate cut if uncertainty continued to weight on demand, while Gertjan Vlieghe told a newspaper that it would take much to “swing it one or the other”.
Given that Michael Saunders and Jonathan Haskel both voted for a rate cut in November and December, that made the prospect of a 5-4 vote in favour of a cut credible.
But there are two reasons why that cut may not happen — at least not for now. The first is that all the data show what happened in November and December. Since then the uncertainty over Brexit has been removed, at least temporarily, and chancellor Sajid Javid has indicated he will use the 11 March Budget for a spending and investment spree.
The second is that surveys covering the period after the election such as the house price reports from Halifax and RICs and the Deloitte CFO survey were pretty upbeat.
The second is that the statements by Dr Carney, Dr Tenreyro and Dr Vlieghe were conditional on future signs of a slowdown. With that in mind, traders and economists will be focused on a slew of data over the next two weeks on the labour market, industry and retail sales.
Who ever said economics was boring?