Heavy selling sent the pound tumbling to its lowest level against the US dollar in more than three months after a double dose of economic bad news convinced currency dealers that the Bank of England would ditch plans to raise interest rates next week.
A sharper than expected slowdown in manufacturing and signs that hard-pressed consumers have lost their appetite for borrowing added to growing evidence that the UK economy has lost momentum since the turn of the year.
Until recently, sterling has been rising against the dollar in the financial markets amid speculation that the Bank’s monetary policy committee (MPC) would tighten policy in response to above-target inflation and higher earnings growth.
But City analysts said an array of recent poor economic data meant the MPC was now unlikely to risk raising official interest rates from their current level of 0.5%.
The latest snapshot of manufacturing from the Chartered Institute of Procurement and Supply (CIPS) and the information company Markit and the Bank’s own survey of money and credit conditions sent the pound tumbling in the foreign exchange markets.
With dealers also growing increasingly confident that the US central bank, the Federal Reserve, will raise interest rates again in June, the pound was trading at just over $1.36 against the dollar as business closed in the City. In the middle of April, it had risen to just over $1.43, close to its level before the EU referendum in June 2016.
Lenders have already bumped up the cost of fixed rate mortgages ahead of the Bank of England’s decision to raise base rate from 0.25% to 0.5%, and mortgage borrowers on tracker and variable rates will see their monthly payments become more expensive in the coming days.
Savers will gain as banks and building societies improve the rates available on deposit and Isa accounts, although increases are unlikely to come for several weeks.
How much consumers and businesses cut back on spending and investment in the face of higher rates will depend on signals from the Bank about the trend for future increases.
The closely watched purchasing managers’ CIPS/Markit fell from 54.9 in March to 53.9 in April – suggesting that the slowing of the economy seen in the first quarter of 2018 continued into the second quarter. While any reading above 50 points to growing manufacturing output, the rate of expansion was the weakest in 17 months.
The MPC will now be waiting for the CIPS/Markit survey of services to see whether other parts of the economy are also seeing a slowdown.
Lee Hopley, chief economist at EEF, the manufacturers’ organisation, said: “The further slowdown in the rate of expansion in manufacturing activity suggests that the weaker official data seen last week wasn’t a temporary aberration. A weaker start to the second quarter with a more subdued pace of growth in new overseas business perhaps reflects concerns about the erection of new barriers to trade, the recent pick up in sterling and a softer growth patch at the start of the year in European markets.”
Rob Dobson, director at IHS Markit, which compiled the manufacturing survey, said: “The start of the second quarter saw the UK manufacturing sector lose further steam. The headline PMI dipped to a 17-month low as growth of production, new business and employment all slowed.
“While adverse weather was partly to blame in February and March, there are no excuses for April’s disappointing performance, making the chances of a near-term hike in interest rates by the Bank of England look increasingly remote.”
Meanwhile, the Bank of England’s monthly money and credit statistics showed that unsecured lending to consumers stood at just £300m in March, the smallest increase since November 2012 and well down on the monthly average for the latest six months of £1.5bn.
The dramatic decline in consumer borrowing follows a clampdown by the chief financial regulator, the Financial Conduct Authority, on bank lending to consumers, which grew by 10% or more on average between 2014 and 2017. In March, the annual growth rate in consumer credit dropped from 9.4% to 8.6%.Liz Martins, UK economist at HSBC, said the window for a rate rise from the Bank had closed as a result of recent soft economic data.
“Today’s money and credit data were poor, but they are for March, and may reflect some weather effects. But the manufacturing PMI is for April, so it is the first piece of data we have for the second quarter. It does not make for a reassuring start.”
