The MPC Meets Next Week ...

Next  week, it will be the turn of the MPC to make the big rates decision. The Bank of England's Monetary Policy Committee (MPC) is expected to hold interest rates at 5.25% at the upcoming meeting on June 20, 2024.

Will the MPC cut rates? Market expectations, based on overnight index swaps, suggest that August 3 is the more likely date for the first rate cut since 2020, with at least one more cut anticipated by the end of the year.

While UK inflation has been falling, it remains a concern. As with  the Fed, the Bank is cautious about easing monetary policy too soon, which could lead to a resurgence in inflation  expectations. The latest data indicates that inflation CPI basis is expected to fall towards the 2% target but will rise again later in the year.

The latest U.K. economic data  suggests the economy expanded by 0.6% in April, year on year compared to growth of 0.2% in the first quarter. News headlines report growth was flat but that is month on month. We always use the year on year comparison.

The unemployment rate increased to 4.4% from 4.3% in April. The number unemployed increased to 1.51 million, up 24,000. The number in work fell by 30,000. Vacancies fell by just 4,000 to 904,000. Earnings three month basis were steady  at 5.9%. The single month data suggest earnings slowed to 5.5%. The housing market is slowing as fixed rate mortgages unwind but real earnings CPI basis increased to 3.6%. 

It's a mixed picture, which could suggest an economy at a turning point. Perhaps to soon yet to move ahead of the curve.

The Bank of England will also consider the broader international economic environment. Recent growth has been stronger in the United States than in the euro area. Inflationary pressures have moderated somewhat but remain a concern. The divergence in monetary policy expectations between the US and Europe, adds complexity to the decision-making process.

The upcoming general election on July 4, 2024, is a further factor. The Bank may prefer to wait until after the election to make significant policy changes. A new [Labour] government will change the economic landscape with new tax and spending plans and a few surprises.

In summary, while there is some speculation about a potential rate cut in June, the consensus among market participants and analysts is the Bank of England will hold rates at 5.25% next week, with a more probable rate cut occurring in August and one further rate cut possible this year. As always we recommend a model scenario of base rates at 4.5% in the years ahead,  no return to Planet ZIRP ...