Just a couple of months ago it seemed a certainty that the Bank of England would raise interest rates when its monetary policy committee meets this week.
The economy appeared to be heading in the right direction, inflation had picked up and there were signs that wages were also beginning to rise.
However, a series of weak data has pointed to the possibility that predictions of a sustained recovery had been premature and perhaps ultra-low rates - which help stimulate borrowing and therefore economic growth - could be here for a bit longer.
To raise the cost of borrowing would risk choking the economy and further stunting growth. Having hinted in February that interest rates may soon be on the way up from their current 0.5 per cent, the BoE is now in an unenviable position of being “damned if they do and damned if they don’t”, says Sajiv Vaid, a portfolio manager at Fidelity
“It all seemed to be going according to plan for the Bank of England (BoE), as market expectations gravitated towards an interest rate hike in May, with an assigned probability of over 90 per cent. Since then, however, the probability of a UK rate hike this week has collapsed to less than 20 per cent, representing a substantial fall from the highs of late March.
"Since February there have been clear signs that firstly, the UK is growing slower than they expected; highlighted by Q1 GDP, which showed the UK economy growing by the slowest quarter since Q4 2012 at a paltry 0.1 per cent, and weak manufacturing PMI indicating that weak first quarter data may be extending into Q2."
“Secondly, the inflation picture looks more benign, at 0.3 per cent lower than their projections in February and while real wages have crept up, it is doubtful whether this is enough to boost consumer confidence."
Nevertheless, he said a rate hike could not be ruled out completely.
“A May hike would represent a policy mistake in my opinion and unless accompanied by a markedly dovish tone, would also raise questions about the BoE’s credibility which is just about intact… for now,” he added.
Neil Birrell, chief investment officer at Premier Asset Management, agreed that the situation had rapidly shifted from a high probability of a rate rise to a strong chance that they will remain unchanged.
Uncertainty around Brexit will also weigh on the minds of MPC members when they meet on Thursday, he said, meaning they are more likely to err on the side of caution and leave rates untouched.
“Any other decision would now be a major surprise to markets, particularly the currency; sterling has weakened quite sharply and may stay under pressure in the short term.
“The balancing factor to the debate is that real wage growth is now in a healthier state, but not strong enough to tip the balance this month. The focus will be on any comments from the committee on the economic outlook and future path for rates.”
Russ Mould, investment director at AJ Bell, says Bank of England Governor Mark Carney “now appears to be vacillating once more”.
