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Forex Maket News - Economics Weekly: Could the BoE raise interest rates to 5.50% on Thursday?Economics Weekly:
Could the BoE raise interest rates to 5.50% on Thursday?
â€¢ Key manufacturing and services surveys in the US, UK and Europe feature this week, providing a perspective on economic growth in these areas.
â€¢ US labour market data on Friday includes non-farm payrolls, unemployment and average earnings growth. We are looking for a strong jobs number for March, indicating that economic growth is robust.
â€¢ Markets are closed for Good Friday in the UK and Europe.
UK markets will focus on the Bank of England interest rate decision on Thursday. Although there is some evidence to suggest that the MPC may increase rates, we believe it most likely that the committee will hold back until full analysis of economic growth and inflation is available to them in the May Inflation Report, prior to the next meeting. And then should they judge it necessary, they may increase rates by 0.25% to 5.5% at their meeting on 10 May. The minutes of the March MPC meeting showed that the committee voted 8-1 in favour of keeping interest rates at 5.25%. David Blanchflower voted for a cut, which surprised markets because there was no vote for a rise, but this by itself does not preclude the possibility that the MPC may fire another surprise. We agree with Bank of England Governor Mervyn Kingâ€™s view expressed last week that the current rate of growth of money supply is not consistent with stable inflation, see chart a. While CPI inflation rose to 2.8% in February, both facts suggest that if not this week, interest rates are likely to rise soon. UK data releases this week include on Monday, the manufacturing PMI survey, which is expected to fall a touch to 54.7 in March from 55.4 in February. But with the index likely to stay above the 50 level, this indicates expansion in UK manufacturing. This should be borne out on Thursday, by data showing that UK manufacturing output in February rose 0.3% on the month and 2.2% on the year, rebounding from Januaryâ€™s decline. The UK services PMI, published Wednesday is expected to strengthen from 57.4 in February to 58.5 in March, see chart b, reflecting continued strength in UK financial and business services. Finally, the NIESR GDP rolling 3-month average figure will be closely watched for clues about Q1 economic performance, published Thursday.\
The annual core PCE index, the Fedâ€™s preferred inflation measure, accelerated to 2.4% in February from 2.2% in January, so markets will keenly watch US data releases that offer a perspective on whether or not the economy is heading for a soft / hard landing implying less / more of an urgency to cut interest rates from 5.25%. The ISM manufacturing and services surveys feature on Monday and Wednesday, respectively. Both are likely to have strengthened. The key non-farm payrolls number is released on Friday, along with unemployment and average earnings data. We expect a set of strong numbers, including March jobs growth of 150,000 compared with 97,000 in February, based on low initial claims figures, which last week fell to the lowest level since January.
Eurozone CPI inflation in March also accelerated, while business confidence and employment data have underpinned growth in the region. So this weekâ€™s PMI survey results are expected to be favourable. Retail sales may also have rebounded from a sharp 1% fall in January to 0.3% growth in February. The data continues to support our view that the ECB will raise interest rates from 3.75% to 4% by June.
Nichola James, Senior Economist
Lloyds TSB Bank,
London EC3R 8BQ
0207 283 - 1000
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