How will Mark Carney respond to the FTSE 100 sell-off? The shadow MPC votes to hold as market bets on May hike pull back

 
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Bank of England governor Mark Carney will have a tricky task to avoid more volatility (Source: Getty)

Markets have dialled back their bets on a May rate hike from the Bank of England after the massive market sell-off at the start of the week, with Mark Carney due to make his first public statements since the turmoil tomorrow.

Investors are currently pricing in a 37 per cent probability of a rate hike in May, according to calculations based on the Sterling Overnight Index Average (Sonia), a measure of market interest rates, by Panmure Gordon chief economist Simon French.

That represents a fall from the 46 per cent probability priced in at the start of the week, before the dramatic market fall.

Read more: Bulls take back control on global stock markets

The shift in market sentiment comes ahead of the Bank of England's latest monetary policy decision, to be announced tomorrow at midday. City A.M.'s shadow monetary policy committee (MPC) voted almost unanimously in favour of holding interest rates steady, with Brexit uncertainties remaining a key reason for holding back.

The FTSE 100 lost 2.64 per cent in Tuesday's trading, its biggest loss since the day after the Brexit vote, in a move which may give Carney pause before giving the more positive signal which has been expected by economists.

The Bank of England last raised rates only in November for the first time in a decade, but economists are still expecting a hawkish signal from the central bank in recognition of stronger global growth. That would help prepare markets for a faster pace of interest rate rises this year.

The Bank will also tomorrow update its predictions for growth in its quarterly inflation report.

The shadow MPC's votes

Ann Pettifor, director, Prime Economics and guest chair

HOLD Despite marginally better fourth-quarter GDP, the UK economy remains fragile, under-performing almost all developed economies. Growing Brexit uncertainties (exacerbated by dysfunctional government strategy) mean that any ill-timed interest rate hike could cause significant damage. Unemployment is stable over the last six months at around 4.3 per cent, average real wages are still slightly falling (and no higher than 12 years ago), while nominal wage growth is lower (at around 2.4-2.5 per cent) than a year ago. Consumer price index inflation has remained steady since August at around three per cent, with “core inflation” (excluding food and energy) a little lower.

Simon Ward, chief economist at Janus Henderson Investors

HOLD Growth remains respectable and labour cost pressures are building but December monetary numbers – the first since the rate hike – were weak, arguing against further policy tightening now.

Vicky Pryce, chief economic adviser, CEBR, and former joint head of the Government Economic Service

HOLD Inflation shows signs of peaking as the impact of the earlier sterling depreciation diminishes and despite strong external demand growth is slowing down again as Brexit uncertainty persists.

Kallum Pickering, senior UK economist at Berenberg

HIKE GDP growth accelerated to above potential in the second half of 2017. Global demand is strengthening. Domestic demand remains resilient. Wage growth is accelerating. The economy would benefit from less stimulative monetary policy.

Tej Parikh, senior economist at the Institute of Directors

HOLD Uncertainty around Brexit remains a key sticking point for business activity, and hence economic growth, in 2018. As such, the Bank must delay normalising monetary policy, at least until the picture around transition arrangements clears up.

Ruth Gregory, UK economist at Capital Economics

HOLD for now. But leave the door open for another rate hike in the spring if the economy continues to grow solidly and pay growth strengthens further.

Simon French, chief economist at Panmure Gordon

HOLD UK households and businesses require a strong steer to expect higher interest rates during 2018. However, given the uncertainty surrounding investment, trade and consumer spending trends, hold rates at this stage to further assess the spillover from strong global growth.

Adam Chester, head of economics at Lloyds Bank Commercial Banking

HOLD Given the ongoing uncertainty, there is no imperative to raise interest rates just yet. But with limited labour market slack and the economy holding up relatively well, the case for another small rise is building.

Mike Bell, global market strategist, JP Morgan Asset Management

HOLD With elevated uncertainty around the likelihood of a smooth Brexit and the recent business surveys showing a deterioration in the growth outlook another rate rise seems unwise.

Read more: Shadow MPC: After the historic hike, Bank of England should hold fire

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