Ear to the Ground

10 May 2024

It was a big week for the UK in terms of economic data being released.  Although a lagging indicator, it was good to see the UK economy exit recession in the first quarter of 2024.  Economic growth of 0.6% was posted compared to the previous quarter, significantly better than the contraction of 0.3% posted in the final quarter of 2023 and ahead of the consensus forecast of 0.4%.  There was growth within the services and manufacturing sectors, although construction continued to be a laggard. 

Better news from the latter could be seen moving forward, with the construction purchasing managers index for April rising to a level of 53, which was above the forecasted 50.4.  An index level above 50 implies expansion within the sector.  An improving domestic economy was cited as the reason behind the stronger than expected figure.

All eyes were undoubtedly on the Bank of England, however, as the Monetary Policy Committee (MPC) met to set interest rates.  Unsurprisingly, they took the decision to remain on hold at 5.25%, which was widely expected by markets and economic forecasters alike.  As the saying goes, however, the devil was in the detail.  Whilst seven members of the MPC voted to hold, there were two who voted for a cut of 0.25%.  This was one member more than the previous meeting. 

Like the US Federal Reserve and European Central Bank, the future decisions of the Bank of England remain data dependent.  The next inflation print later this month is expected to show that it continues to fall back towards target, although much of this will be due to the base effects of energy costs.  Consumer price inflation is now forecast to be 1.9% in two years’ time. 

This is of course all good news and perhaps provides scope for the MPC to embark on reducing the interest rate from what is the highest level since 2008.  They will need to be mindful of moving too early, not wanting to reignite inflationary pressures.  However, cutting interest rates does not mean that monetary policy will not remain restrictive, and the MPC will be very much aware of this.  With economic growth being stronger than expected, they will undoubtedly be keen to preserve this more positive environment. 

The next time they meet is June and the jury is divided as to whether this meeting will come too early or not.  The flip of a coin has similar odds here.  Unless we see a sharp pick up in inflationary pressures, perhaps due to some external shock, a cut before the summer is out appears on the cards.  What summer I hear you ask!