April 20, 2018 / 11:13 AM / in 7 months

EXPLAINER-Will the Bank of England raise rates in May after Carney dampened expectations?

(Adds more reaction, detail from MPC’s Saunders)

By Costas Pitas and Andy Bruce

LONDON, April 20 (Reuters) - Bank of England Governor Mark Carney dampened widespread expectations for an interest rate hike in May, pointing out there were also “other meetings” this year.

WHAT CARNEY SAID:

“I don’t want to get too focused on the precise timing, it is more about the general path,” Carney told the BBC.

He said Britain should prepare for “a few interest rate rises over the next few years.”

“We have had some mixed data ... We’ll sit down calmly and look at it all in the round.”

“I am sure there will be some differences of view but it is a view we will take in early May (at the next meeting of the Bank’s Monetary Policy Committee), conscious that there are other meetings over the course of this year.”

WHAT THE MARKET SAYS:

British government bond prices jumped on Friday.

Expectations of a UK interest rate increase in May have shrunk to below 50 percent from 70 percent earlier in the week, according to estimates derived from the swap markets.

Sterling took another leg down on Friday to $1.4060 after falling nearly 1 percent in the New York session.

HOW IS THE MPC SPLIT?

In March, the Bank of England’s Monetary Policy Committee voted 7-2 to keep rates at 0.5 percent.

Ian McCafferty and Michael Saunders - who were the first officials to call for rates to rise in 2017 - said it was time for rates to increase again for only the second time since the 2008 financial crisis.

Saunders on Friday said the BoE no longer needed to keep its foot firmly on the accelerator at a time of rising domestic inflation pressure.

He reiterated the BoE’s joint position that “any further tightening is likely to be at a gradual pace and to a limited extent” but added that “a key point is that ‘gradual’ need not mean ‘glacial’.

Saunders also said the range of views about interest rates among MPC members may be no wider than usual.

EXPECTATIONS

A firm majority of economists in a Reuters poll taken before Carney’s comments and published earlier this week said they expect the BoE will raise interest rates to a new post-financial crisis high of 0.75 percent in May.

WHAT THE ANALYSTS SAID ANDREW SENTANCE, PWC SENIOR ECONOMIC ADVISER, EX-MPC MEMBER

“Quite likely that all 4 external MPC members will vote for a May rate rise. Can they get 1 or 2 internal votes to support them? If Carney is opposed, Broadbent and Haldane are main candidates to push through a rate rise - so watch their statements in the next week or so.”

ALLAN MONKS, JPMORGAN ECONOMIST:

“(Carney’s commentary) opens the possibility of the BoE passing on May and instead hiking later in the year as the data improve.

“The data have not been uniformly weak, especially at the start of the quarter, and it is hard to believe the BoE will delay a rate rise because of bad weather. Should the April surveys bounce decisively this would help reassure the BoE that growth is set to improve this quarter.” BANK OF AMERICA MERRILL LYNCH ANALYSTS:

“Then last night Governor Mark Carney suggested delay. In a BBC interview he said the BoE was conscious of ‘other meetings over the course of the year’ when they could hike. As hints go, we think it’s as strong as we get. The data justify delay in our view. We have been sceptical of the need for a May hike.”

JORDAN ROCHESTER, FX STRATEGIST AT NOMURA:

“(Carney’s) interview last night has rocked the boat and introduced a much higher level of uncertainty (over) whether the BOE will decide to raise rates in May or not. We still expect a hike in May, structural reasons to be short front end remain.”

UNICREDIT ECONOMISTS

“His comments suggest the vote on whether to hike in May is now on a knife-edge, and next week’s 1Q18 GDP report (we expect growth of just 0.2 percent (quarter-on-quarter), in part due to a hit from adverse weather) could be decisive. A hike in May is still likely but, as we had previously warned, it is a much closer call than financial markets were expecting.”

MARC OSTWALD, MARKET STRATEGIST AT ADM INVESTOR SERVICES:

“Carney struck back against any doubters that he is still king of the ‘unreliable boyfriends’, with his comments casting a whole (load) of doubt that a further 25 bps rate hike is a slam dunk.”

Additional reporting by Jamie McGeever, Editing by Guy Faulconbridge and Toby Chopra

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