(Bloomberg) -- The flurry of excitement about a Bank of England rate hike is now looking a bit overcooked.
Three out of eight policy makers voted to tighten policy in June, and Governor Mark Carney and Chief Economist Andy Haldane said shortly afterward they may consider a rate increase soon. Prospects changed when inflation cooled and the economy slowed more than the bank was expecting in the first half of the year.
Investors are less convinced than they were a few weeks ago that the MPC will raise its benchmark rate before the end of 2017. Traders are pricing about a 40 percent probability of an increase, down from 56 percent when Carney, at the end of June, said that some removal of stimulus may become necessary.
The BOE is also likely to announce that the Term Funding Scheme -- introduced to help ensure low rates are passed on to consumers and companies -- will not be extended beyond February 2018, according to Bloomberg Intelligence economists. That could be another reason to refrain from raising rates.
Economists expect the central bank's benchmark rate to stay at a record-low 0.25 percent Thursday, when it also publishes fresh forecasts on growth and inflation. Carney will give a press conference at 12:30 p.m. in London. Forecasters expect a 6-2 split, according to a Bloomberg survey, with Michael Saunders and Ian McCafferty voting once more for a rate hike.
The decision is the first for policy maker Silvana Tenreyro. She replaced Kristin Forbes, known for her outspoken view on the need to damp price growth. While Tenreyro's opinions on how monetary policy should respond aren't known, she has said that leaving the European Union could have a negative impact and that the BOE faces a difficult trade-off with faster inflation and weak growth.
The inflation rate unexpectedly dropped to 2.6 percent in June. That's still above the BOE's 2 percent target but is lower than May's 2.9 percent. The depreciation of the pound since the Brexit vote, the main driver of the surge in prices, has eased a bit since the last meeting, with the U.K. currency up more than 3 percent against the dollar since June 15.
The chance that inflation goes much above 3 percent “looks to have been diluted” as oil prices soften, according to Howard Archer, an economic adviser at EY ITEM Club. “Ongoing muted earnings growth and stuttering U.K. economic activity are also keeping a lid on domestic price pressures,” he said.
Even with unemployment at its lowest level in more than four decades, wage growth is struggling to keep pace, meaning household incomes are being squeezed. In July, GfK's consumer confidence index dropped back to its post-Brexit low.
Slowing momentum could also leave policy makers feeling less hawkish. After a disappointing start to the year, the economy hardly recovered in the second quarter, with growth of 0.3 percent. The BOE had predicted a reading of 0.4 percent in May, and economists see the central bank revising down its forecasts.
Still, the weaker pound helped export orders jump to the highest in seven years in July, the IHS Markit Purchasing Managers' Index showed on Tuesday. At the same time, the report showed factory price pressures from the currency's plunge after the Brexit vote last year have started to weaken.
A Bloomberg survey of economists predicts growth of 1.6 percent in 2017 and 1.3 percent in 2018, below the BOE's forecast of 1.9 percent and 1.7 percent.
Concerns that consumer credit is getting out of hand may also be easing. It's still growing at a 10 percent pace, but it's cooled somewhat and BOE financial stability officials took action to limit some areas of risk from borrowing.
The Financial Policy Committee ordered lenders to hold billions of pounds of extra capital and strengthened rules on mortgage lending, taking some of the pressure off monetary policy to rein in credit growth.
Deputy Governor Ben Broadbent emphasized the difficulty facing policy makers in July. “There are still a lot of imponderables,” he said. “It is a bit tricky at the moment to make a decision.”
To contact the reporters on this story: Hannah George in London at hgeorge13@bloomberg.net, Jill Ward in London at jward98@bloomberg.net.
To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Brian Swint, Lucy Meakin
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