Bank of England under pressure to delay interest rate rise

Fresh pressure on the Bank of England to delay raising interest rates has emerged after figures for manufacturing and consumer credit highlighted the weakness of the UK economy.

Until recently, next week’s Bank meeting was widely expected to sanction another rate increase, but weak growth figures on Friday made such a move less likely and data on Tuesday seems to rule it out almost entirely, sending the pound to a three-month low against the dollar.

The latest monthly snapshot of industry from the Chartered Institute of Procurement and Supply and the information company Markit (CIPS/Markit) showed that the slowing of the economy recorded in the first quarter of 2018 continued into the second quarter.

Q&A

What is the impact of an interest rate rise?

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.

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The closely watched purchasing managers’ CIPS/Markit fell from 54.9 in March to 53.9 in April. While any reading above 50 points to growing manufacturing output, the rate of expansion was the weakest in 17 months.

Meanwhile, the Bank of England’s monthly money and credit statistics detected a marked waning in consumer appetite for unsecured borrowing in March. 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%.

Rob Dobson, director at IHS Markit, which compiles the 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.”

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.”