United Kingdom momentum will bounce back, BoE's Carney says

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The Bank of England Monetary Policy Committee (MPC) will consider tomorrow at its May meeting whether to raise the official UK Bank Rate to over 0.5 per cent for the first time since March 2009.

Sterling reversed earlier gains and fell to the day's lows on Thursday after the Bank of England kept interest rates on hold as widely expected, but cut inflation and growth projections for this year and the next.

Currently, market pricing suggests that the chances of a rate increase today have fallen to 13% from as high as 87% in April.That reflects both weak United Kingdom economic data and comments by Carney, who told the BBC in an interview last month that an interest rate rise is likely this year but that any increases will be gradual. Ahead of the latest batch of soft UK CPI and GDP reports and dovish comments by the head of the Bank of England, the rates markets had priced in a 25-bps rate hike with a likelihood of 100%.

In the first three months of the year, the British economy barely grew, expanding at a quarterly rate of just 0.1 percent, with the construction sector faring particularly badly.

The Bank cut its growth forecast for the year to 1.4%, down from the forecast of 1.8% made in February.

"The costs to waiting for additional information were likely to be modest, given the need for only limited tightening over the forecast period to return inflation sustainably to the target".

"So yet again we have to digest another change of tack from Bank of England policymakers", said Michael Hewson, chief market analyst at CMC Markets.

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'The UK trade in goods deficit with non-EU countries narrowed £1.5 billion to £9.9 billion in the three months to March 2018, while the deficit with the European Union widened £0.4 billion to £24.7 billion over the same period'.

"A month or so ago it looked like a May rate rise was a near-certainty".

In March, inflation was running at an annual rate of 2.5%, which is above the Bank's target of 2%. Competition among challenger banks, in combination with higher SWAP rates, appears to be fuelling this rise.

'In a world where other central banks are seeking to normalise their rates, the combination of slow growth and Brexit uncertainty must surely be raising some concerns about the size of the current account deficit'.

Whilst the GDP data was hugely disappointing growing just 0.1% quarter on quarter, a good deal of the data and modelled data are linked to unseasonable cold weather supporting the idea that the weak prints were likely to be one off's rather than a more serious structural change in the economy.

They repeated their calls for a rise to 0.75 per cent to avoid more "abrupt" policy action further down the line. In the year to March, annual consumer price inflation was 2.5 percent, well below the bank's projection of nearly 3 percent.

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