After several consecutive months of weak economic data, a new survey last week by IHS Markit suggested that the UK economy entered 2020 in the middle of an economic bounce-back. Signs of an apparent recovery could have significant impact on the direction of interest rates.
IHS Markit, which publishes a monthly Purchasing Managers Index (PMI) covering the services, manufacturing and construction sectors of the economy, measures output on a scale of 50. A reading above 50 usually signals expansion and one below 50 signifies contraction.
For January 2020, the composite PMI, combining all three sectors of the economy, gave a reading of 52.4, having been giving readings below 50 in previous surveys back in late 2019.
This suggests the economy could be in the midst of an upswing at present.
Pressure to cut interest rates eases for now
The Bank of England (BoE) is expected to convene this week, to assess whether to adjust interest rates, based on the trajectory of the economy. Last week’s PMI survey has done much to ease the pressure on the BoE’s Monetary Policy Committee (MPC) to cut interest rates.
Chris Williamson, chief business economist at IHS Markit explained: “It seems likely that the rise in the PMI kills off the prospect of an imminent rate cut by the BoE, with policymakers taking a wait-and-see approach, as they assess the performance of the economy in a post-Brexit environment.”
The Current Bank Rate stands at 0.75 per cent – the MPC will be making an assessment about what direction interest rates should take in the coming months, based on factors such as demand, as well as price pressures in the form of inflation.
Stronger-than-expected economic growth could persuade the MPC to keep interest rates on hold, rather than cutting to 0.5 per cent or lower, but this could be tempered, as the rate of inflation fell to 1.3 per cent in December 2019, according to the Office for National Statistics (ONS).
This is significant, as the BoE is committed to ensuring that inflation remains as close to its 2 per cent inflation target as possible. With inflation at such low levels, wages are continuing to rise in real terms. Last week, it was revealed that London’s housing market became more affordable, as weak price growth is matched by strong wage growth.
Markets watch BoE with interest
Nordea Markets, an internal capital markets operator, analysed the PMI data, and came to the view that the BoE would keep interest rates stable, believing the bounce-back seen in the survey was large enough to neutralise any need for looser monetary policies.
Investors will be monitoring the BoE’s decision on interest rates closely this week, with the latest Monetary Policy Report expected at midday on 30th January, especially as it comes during the week that the UK finally leaves the EU.
Data from the ONS last week appears to suggest that the labour market remained resilient in late 2019, as the employment rate hit a record high. The implication is clear: the economy remains strong, but it remains unclear what impact this will have on the MPC’s decision.
The possibility of interest rates remaining low but stable is of interest to not only investors but also first-time buyers, as the Current Bank Rate has an effect on the overall mortgage rate they can expect to pay over the coming years.
Mortgage rates have gradually drifted lower in the past decade, as the Current Bank Rate has remained close to zero following the global financial crisis.