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UK Manufacturing PMI Rises, BoE Set To Hike Rates

UK Manufacturing PMI Rises, BoE Set To Hike Rates

2017-11-01 09:47:00
Martin Essex, MSTA, Analyst
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Talking Points

- The purchasing managers’ index for the UK manufacturing sector climbed unexpectedly in October.

- That removes one possible obstacle to the Bank of England increasing UK interest rates tomorrow, as overwhelmingly expected in the markets.

- However, the British Pound is unlikely to benefit as the BoE may well accompany the hike with a dovish commentary on the chances of further monetary policy tightening.

What Does the Fourth Quarter Hold for the Pound, Equities, Oil and Other Key Markets? Find out here

The purchasing managers’ index for the UK manufacturing sector climbed in October, rising to 56.3 from an upwardly revised 56.0 in September and above the expected 55.9. That leaves the way clear for the Bank of England to double the UK’s benchmark Bank Rate to 0.5% tomorrow. However, such a hike – the first since 2007 – is overwhelmingly priced in to the markets, leaving the British Pound vulnerable to profit-taking after the decision.

Earlier, there were further signs of a relatively healthy UK economy, with the Nationwide house-price index release showing an increase of 2.5% year/year in October, higher than both the expected 2.2% and the previous month’s upwardly-revised 2.3%. The British Retail Consortium’s shop-price index was unchanged at minus 0.1% year/year.

That leaves expectations intact that the Bank of England will increase Bank Rate tomorrow. However, the Pound’s response will depend on how many members of its monetary policy committee vote to leave rates unchanged and on whether BoE Governor Mark Carney’s comments after the decision are dovish, perhaps trying to dampen speculation about further rate hikes ahead.

In response to the PMI data, the British Pound strengthened but could well ease back against the US Dollar after trading broadly sideways for most of October and benefiting earlier this week from a comment by the EU’s chief Brexit negotiator, Michel Barnier, that he is ready to speed up the Brexit talks with the UK.

Chart: GBP/USD Five-Minute Timeframe (November 1, 2017)

UK Manufacturing PMI Rises, BoE Set To Hike Rates

Chart by IG

According to IHS Markit, which collates the PMI data, the UK manufacturing sector started the final quarter of the year on a solid footing. Production and new order volumes continued to rise at robust rates, as companies benefited from strong domestic market conditions and rising inflows of new export business. Price pressures remained elevated, however, with rates of inflation in input costs and output charges both accelerating and staying well above historical series averages,” it said.

Markit noted that the headline PMI has now signaled expansion for 15 consecutive months and that the sector looks to be achieving a quarterly rate of expansion close to 1%, although price pressures continue to build.

--- Written by Martin Essex, Analyst and Editor

To contact Martin, email him at martin.essex@ig.com

Follow Martin on Twitter @MartinSEssex

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