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Investors have been expecting, and the Bank of England has been quietly advertising, a UK interest rate hike in May.

However, it is now starting to look like the widely anticipated Bank of England rate rise may not happen after all. It would be the second interest rate increase in six months, and would be following in the wake of nine years of inactivity by the UK central bank, apart from the post-EU referendum cut in August 2016.

Bank of England rate – will we see a rise this week?

But now it looks like Bank of England governor Mark Carney is vacillating. The market was expecting a Bank of England rate rise from 0.5% to 0.75% – 25 basis points – but that is no longer looking like a certainty. Why is this?

Firstly, it looks like UK inflation is cooling off. There is still a chance that rising oil prices will make their presence felt over the summer months, but purchasing managers’ indices are softening it seems. The UK Q1 GDP growth figure was lower than expected at just 0.1% quarter-on-quarters and 1.2% year-on-year.

The Bank of England’s primary mandate is to control UK inflation, and right now it is still at 2.6%, which is well above its target rate of 2%. The Bank of England is meant to set interest rates based on the expectations of inflation two to three years from now, so just because we have seen some sluggish economic growth figures in Q1, possibly influenced by the bad weather in March rather than any major systemic issues, does not mean that Carney will not pull the trigger on another rate hike.

“It could be seen as a blow to the credibility of the Bank, Mr Carney and the pound if rates are left unchanged thanks to a backward-looking, likely-to-be revised GDP growth number,” observes Russ Mould, investment director at stock broker AJ Bell.

Which way will the Bank of England jump?

So which way will the Bank of England jump? According to Hargreaves Lansdown, markets have priced a 92% chance there will be no change to the Bank of England rate on Thursday. This is a major, major reversal of sentiment, when you consider that a month ago markets were pricing in a 98% chance of a rate rise in May. The poor economic figures, including sickly retail sales, may have changed minds.

“Back in early April, a rate rise at the May meeting was so widely predicted that it seemed nailed down,” says Sarah Coles, an analyst with Hargreaves Lansdown. “A slew of disappointing data, and efforts by Mark Carney to talk down the chances of a rate rise, mean the markets are now pricing in the chance of a rise at just 8%.”

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Stuart Fieldhouse

Stuart Fieldhouse has spent over 20 years in journalism and financial communications, including six years as a wealth management correspondent for the Financial Times group, covering capital markets and international private banking, and as an investment banking correspondent for Euromoney in Hong Kong.

Stuart has worked as head of content at CMC Markets, supporting the re-launch of its global financial spread betting and CFD trading platforms. He is also the author of two books on trading, published by Financial Times Pearson. Stuart continues to work with hedge funds, private banks, stock exchanges and other financial institutions on their communications, data and marketing requirements.

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