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14 May 2024 | 5 minutes to read
May’s Monetary Policy Committee meeting promised investors an update on Bank of England thinking and a fresh set of forecasts. There were three things to watch out for at the meeting: a shift in the voting pattern, a dovish tilt to guidance and a change to the forecast.
The votes shifted to 7-2 from 8-1 in favour of leaving the policy rate unchanged, with two members supporting a 25bps rate cut. However, the guidance remained relatively unchanged from the March meeting.
The new forecast incorporated the updated market-implied path for rates of c. 70bps higher across the forecast than implied at the time of the February forecast. This path implies a first cut in August. On the basis of this path, Bank estimates forecast CPI to be below 2% in the final year of the forecast, meeting the Bank’s objective.
The Monetary Policy Report also included a deep-dive into UK labour market statistics and the problems the ONS has faced with participation. While other data sources support the picture of an easing labour market, data accuracy is clearly a concern.
Overall, while Bank forecasts make the case for rate cuts and the dovish tilt in the votes suggest there is growing support for this, it is clear that many members would like to see greater confirmation in the data. At the press conference, Governor Bailey confirmed that June was neither ruled in nor out but waiting until August, in line with the market-implied path, would offer greater certainty on the progress of inflation and employment.
Moreover, while data has been decidedly mixed, Q1 GDP growth data was stronger-than-expected in the UK. GDP grew by +0.6% quarter-on-quarter, ahead of consensus and a rebound from the -0.3% decline seen in Q4 of 2023. March was particularly strong, growing by+0.4%, up from +0.2% in February. Both services and manufacturing activity rallied in March, with strong pharmaceutical activity making up for weakness in autos. Over the quarter, retail sales were boosted by less precautionary saving. Business investment also rebounded, boosted by housing, though this is expected to moderate.
All in all, brighter activity data makes the case for being patient with cuts, though the MPC acknowledges that, given the restrictive stance of policy, there is scope for cuts even if the UK continues to avoid recession.
US consumer confidence data dipped unexpectedly last week. The University of Michigan consumer confidence index slipped almost 10 points to 67.4 in May, from 77.2. Both the “current conditions” and “expectations” subcomponents declined, while inflation expectations edged higher. Economists had not expected such a fall in the survey, given that petrol prices, which have a strong impact on sentiment, had fallen back and data suggest the labour market is cooling only gradually. While the equity market is close to record highs (another factor that influences confidence), the mid-April sell-off may have impacted sentiment. Geopolitical worries could be another factor, along with the upcoming election.
While the reading may be noise, investors will looking at other data for signs of a weakening consumer.
Chinese economic data remains mixed, though supportive policy announcements continue. Property sales data shows continued softness in activity, with steel output also lower. However, trade activity has picked up. Exports rallied by +1.5% year-on-year, after a -7.5% fall in March. Adjusting for lunar new year, growth is likely still marginally positive, with technology exports supporting growth. Imports also rallied, rising +8.4% year-on-year, up from -1.9% in March. Again, technology components spurred growth.
CPI also staged a modest recovery, rising to +0.4% year-on-year, from +0.1% in March. Food prices remain in deflationary territory, though pork and vegetable prices strengthened. Non-food prices strengthened, supported by fuel.
Looking at loan growth, the picture was less positive. Both household and corporate loans declined on a year-on-year basis, along with total social financing, which fell -8.4% year-on-year.
On the policy front, the People’s Bank of China called for greater support for the economy. This coincides with regulators prohibiting banks from offering deposit rates above the capped rate, in a bid to free up funds. Home purchase restrictions have also been removed on two large tier-two cities, in a bid to support the real estate sector.
After the April Politburo meeting, more reforms and support measures are expected to be announced in July, likely relating to fiscal policy and the property market. Faster government bond issuance is expected, along with measures to help property developers to get funding for incomplete projects.
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