Bank of England policymakers will deliver their verdict on interest rates on Thursday in a “knife-edge” decision following recent speculation a cut could be on the cards.
Economists believe tentative signs of a pick-up in the economy may be enough to stay the Bank’s hand, but financial market are pricing in a 60% chance of a cut from 0.75% to 0.5%.
Gloomy economic data has spurred on a raft of Bank rate-setters to signal growing support for a cut, with the vote expected to be a close call.
Two of the nine-strong Monetary Policy Committee (MPC) have voted to lower rates from to 0.5% in the last two meetings and disappointing growth data and falling inflation could see other policymakers join them.
But many economists believe better news on the UK jobs market and signs of improving sentiment in key areas of the economy may keep rates on hold.
The Bank will have its latest quarterly forecasts to hand in the Monetary Policy Report accompanying the noon decision and will have been closely watching recent sentiment surveys in the economy for clues on any post election “Boris bounce”.
The preliminary reading for purchasing managers index (PMI) showed Britain’s private sector returned to growth for the first time in five months in January.
James Smith, developed markets economist at ING, is forecasting for rates to be held, with four of the MPC members at most voting for a cut.
He said: “It’s a close call, but a recent post-election pick up in sentiment should be enough to see the Bank of England avoid cutting interest rates this month.”
The EY Item Club is also predicting rates will stay on hold on Thursday and for the next 18 months, having upgraded its growth outlook to 1.2% for 2020 from the 1% previously predicted.
But it stressed the MPC’s decision “looks to be on a knife edge and is very hard to call”.
The City is more divided, after official monthly growth figures showed gross domestic product (GDP) unexpectedly fell by 0.3% in November after a weak performance in the manufacturing sector.
This was followed by data showing inflation tumbling to a three-year low of 1.3% in December.
Retail figures from the CBI on Monday also have little comfort, showing sales flat-lined for the third straight month in January.
Stefan Koopman, senior market economist at Rabobank, is pencilling in a rates cut.
He said: “We have been flagging the risk of Bank of England rate cuts in 2020 since late-summer.
“In our view, global growth will remain sluggish and we don’t expect the uncertainties regarding the UK’s future possible trading relationships to abate anytime soon.”
It will mark the last rates decision for Bank governor Carney, who is handing over the reins to Financial Conduct Authority boss Andrew Bailey on March 16.
He has recently warned a “prompt response” on rates would be needed if growth does not pick up as expected.
But Mr Carney has already stressed the importance of sector sentiment surveys, which experts believe will mean he is unlikely to bow out with a vote to cut.