U.K. Data Shouts for Long Pause After First BOE Rate Hike

(Bloomberg) -- The Bank of England may be on track for the first rate increase in a decade next month, but economic data doesn't bode well for an imminent, full-blown tightening cycle.

After U.K. purchasing managers indexes this week that ranged from sluggish to disappointing to downright alarming, a growing number of economists predict that a hike from Governor Mark Carney in November could be a case of one-and-done. While Wednesday's services number came in above forecasts, the non-headline gauges made for troublesome reading, showing that growth in new business fell to the weakest in more than a year and confidence declined.

That tallies with reports earlier this week showing manufacturing growth was slower-than-expected, and construction actually shrank for the first time in 13 months. Markit itself said that the all-sector level last month would normally be associated with policy loosening rather than tightening. 

Still, according to ING economist James Smith, officials may overlook that as they attempt to reset policy after their emergency stimulus package last year.

“The bank is keen to get out of ‘emergency mode' as the initial Brexit shock fades, and are also keen to avoid getting completely left behind in the global race to hike rates. But what it does mean is that any tightening thereafter could be fairly limited.”

RBC's Sam Hill agrees, saying that he remains “cautious about the outlook for the economy with the ongoing loss of momentum in the all-important consumer sector.”

Meanwhile, Bloomberg Intelligence economists Dan Hanson and Jamie Murray point out that September's composite reading of 54.1 is well below the point at which the Monetary Policy Committee has previously hiked, and that conditions in 2018 are unlikely to prompt officials to pursue further increases next year.

“Slower growth is assumed to translate into a wider margin of spare capacity and implies the near-term impact of Brexit represents a shock to demand rather than a shock to supply. If that forecast comes to pass, the committee will be faced with the combination of a weaker labor market, modest pay growth and the downward trend in inflation over the course of next year. Such a mix would be unlikely to prompt the MPC to sanction further rate increases in 2018.”

--With assistance from Fergal O'Brien

To contact the reporter on this story: David Goodman in London at dgoodman28@bloomberg.net.

To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Brian Swint, Lucy Meakin