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Despite signs of a slight slowdown, UK economic growth has held up much better than expected since the Brexit referendum. The PMIs for manufacturing, construction and services published this week suggest Britain's economy has probably slowed from its strong growth during late last year. Analysts at IHS Markit expect economic growth will slow to around 0.4 percent in the first quarter from 0.7 percent in the fourth quarter of 2016.
Meanwhile, UK CPI inflation has picked up following the sharp decline in sterling last year, spiking past the Bank of England’s 2 percent target to register a stronger than expected 2.3 percent year-on-year rise in February, with the core CPI rate hitting 2 percent. Headline inflation could hit 3 percent later this year.
That said, the PMI surveys showed consumers were cutting back on luxuries. Hotels and restaurants, gyms and hairdressers ranked among the worst-performing services in the first three months of 2017. The disappointment was evident in consumer-oriented sectors, in part linked to spending and incomes being squeezed by higher prices.
Speaking at Bloomberg’s European headquarters in London on Wednesday, Bank of England (BoE) policymaker Gertjan Vlieghe said faster inflation alone doesn't mean BOE rate hike. We think that the UK economy may slow over the next two years in the run-up to Brexit which could delay any rate increase, while the rise in inflation could also prove transitory given that wage inflation is quite subdued.
While the BoE is not expected to tighten policy anytime soon, it has indicated that there are “limits to the extent that above-target inflation could be tolerated”. Indeed, one MPC member voted for a hike at the March meeting. The market is pricing in a 25bps rate hike by end 2018.
Research Team at Rabobank, expects steady BoE’s policy well into 2018 and potentially beyond and also expects the BoE to step up hawkish commentary to control any further bout of weakness in the pound.
GBP/USD was trading at 1.2455, down 0.22 percent on the day at around 1100 GMT. FxWirePro's Hourly GBP Spot Index was at -108.941 (Bearish), while Hourly USD Spot Index was at 88.9547 (Bullish). For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex.
