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Evening Standard
Evening Standard
Business
Daniel O'Boyle

Bank of England in interest rate rise dilemma after cloudy GDP picture

GDP figures released today further clouded the picture for the Bank of England, as City traders now see the decision of whether to hike rates by half a percentage point or a quarter point as a toss-up.

The economy contracted by 0.1% in May thanks in part to the extra Bank Holiday for the King’s coronation, but there were signs in the data for both the doves and the hawks on the Monetary Policy Committee.

On the one hand, the decline was smaller than economists’ expectations of 0.3%, suggesting that the economy has proved more resilient to past rate rises than expected. But Paul Dales, chief UK economist at Capital Economics, noted that declines in rate-sensitive sectors of construction and real estate showed “some evidence that the influence of higher interest rates are starting to weigh on activity a bit more”.

Danni Hewson, AJ Bell head of financial analysis, said: “Today’s figures are unlikely to sway Bank of England rate setters, though markets are increasingly split on how big August’s hike will be.”

With inflation at 8.7%, the Bank of England appears certain to raise interest rates again at its next meeting in early August, but whether it opts for a 25-basis-point rise or hikes rates by 50 basis points again remains to be seen.

Last week, markets were expecting the Bank to hike interest rates from 5% all the way to 5.5% at its next meeting in early August. But now they see the next decision out of Threadneedle Street as effectively a coin toss.

Either way, more pain could be on the way for homeowners, as mortgage prices continued their upward march. The average two-year fixed-rate deal is now priced at 6.75%, while the average five-year deal is now 6.27%. Two-year buy-to-let rates approached 7%, rising to 6.97%.

The Bank’s next decision is likely to depend on June’s CPI figures, which are coming on Wednesday. Inflation is likely to fall, but not very far.

James Smith, developed markets economist at ING, said: “For the Bank of England, the focus is still very much on the CPI and wage numbers, and not a lot else for the time being.”

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