Ear to the Ground

21 June 2024

Ready, steady, not quite yet.  This week saw the Bank of England meet to set interest rates.  Unlike the European Central Bank, Canadians or Danes, they weren’t quite ready to cut interest rates, and held at 5.25% as forecast.  The base rate has now been at this level since August last year.  There were two members of the Committee who each voted for a 0.25% cut.  Whilst the others voted for no change, for some the decision to hold or cut was finely balanced.

That finely balanced view was perhaps influenced by the release of inflation data earlier that week.  The consumer price index for the 12 months to May showed that inflation had returned to the target level of 2%, which was in line with forecast and down from the April reading of 2.3%.  Helping drive the figure lower was a further slowdown in food price inflation, whilst prices for housing and utilities, furniture and household equipment continued to decline

Whilst the return to target has taken longer than most expected, we are now considerably below the high of 11.1% seen in October 2022.  So, given inflation is now back at target, why no interest rate cut.  Some point to core inflation, which excludes the more volatile components of food and energy.  Whilst the rate declined here also, it remains above a level considered comfortable, at 3.5%.  At the same time, we have a clear divergence between goods and services inflation.  The former is now firmly in deflationary territory, falling 1.3% year on year, a sharp turnaround from the double digit figure previously seen. 

Service inflation meanwhile for now remains stubbornly high.  Whilst a fall was seen from April, it is still at an uncomfortable 5.7%, above the expected 5.5% for the 12 months to the end of May.  The pricing for services is perhaps being driven by a buoyant consumer.  The latest retail sales data to May was much stronger than expected, posting growth of 2.9% month on month versus a forecast pick up of 1.6%.  Gains were driven by sales at non-food stores.

Perhaps once we see a more meaningful downturn in services inflation, we will see a Bank of England more willing to cut, and of course once we have the general election out of the way.

This article is for information purposes only and should not be construed as advice. We strongly suggest you seek independent financial advice prior to taking any course of action.

The value of this investment can fall as well as rise and investors may get back less than they originally invested. Past performance is not necessarily a guide to future performance. The Fund is suitable for investors who are seeking to achieve long term capital growth.

The tax treatment of investments depends on the individual circumstances of each client and may be subject to change in the future. The above is in relation to a UK domiciled investor only and would be different for those domiciled outside the UK. We strongly suggest you seek independent tax advice prior to taking any course of action.

Sign up today!

To receive notifications on new market insights published to our blog, please complete the below form.

You can unsubscribe at any time by emailing enquiry@lowes.co.uk or by clicking the ‘unsubscribe’ link at the bottom of each email.

Full details of how we use and secure your personal information and how to update your marketing preferences can be viewed in our Privacy Policy