Please see below, an update from EPIC Investment Partners which covers the Bank of England’s latest Monetary Policy Committee meeting and highlights the potential implications for markets. Received this morning – 10/05/2024
As expected, the Bank of England (BoE) maintained its policy rate at 5.25% in a 7-2 vote, with the two dissenters calling for an immediate reduction. This marked an increase in the number of dovish voters compared to the previous meeting. Notably, there were no calls for a rate hike this time around. The central bank revised its forecasts, projecting inflation to fall to the 2% target, reaching 1.9% in two years and 1.6% in three years. For context, CPI fell to 3.2%yoy in March. The central bank also upgraded its economic forecast, saying the recession has ended, predicting growth had expanded 0.4% in Q1’24.
The BoE’s Governor Bailey hinted at the possibility of a rate cut at the next meeting but cautioned that a reduction is not “fait accompli”. He also indicated that cuts may come more aggressively than markets perceive. Interestingly, markets appeared to shrug off the more dovish tone only marginally increasing pricing for a June cut, to ~60%, from just under 50% ahead of the MPC announcement. The odds have, however, been trimmed this morning to under 60% following the stronger-than-expected Q1’24 GDP print which showed the economy expanded 0.6% (exp. 0.4%, prev. -0.3%); indicating that markets do not currently perceive an urgent need for monetary easing.
There are still two sets of inflation – and labour market – data for the BoE and markets to unpick ahead of the June 20 meeting. Bailey expects inflation will ease, before increasing to 2.5% in the second half of the year, “owing to the unwinding of energy-related base effects”. In a similar vein with his ECB counterpart, Lagarde, Bailey stated: “There is no law that the Fed has to go first”.
Rate cuts would undoubtedly be welcomed as a “feel good factor” ahead of the elections, as described by Chancellor Jeremy Hunt. However, in a blow, we read a report from the National Institute for Economic and Social Research (NIESR), which indicates UK Chancellor Jeremy Hunt will likely need to raise taxes, as weak growth and sticky inflation undermine public finances. This clearly conflicts with his plans to cut taxes ahead of what is being reported as a potential Conservative election loss. NIESR recommends replacing Hunt’s fiscal rules with a longer investment compliant framework, potentially requiring income tax hikes up to GBP20bn despite £8.9 billion existing headroom. Moreover, the institute’s growth estimates of 0.4% this year and 0.8% in 2025 is even worse than last week’s dire OECD forecasts which said the UK will suffer the slowest growth amongst the G7 nations.
Finally, for those considering indulging in a “dirty kebab” this weekend, spare a thought for British southerners who must pay three times as much as the rest of the country. In fact, to rub salt into the wound, earlier this week we heard that the German Left Party has proposed the use of state funds to cap the price of kebabs at €4.90 (£4.20), and €2.50 (£2.10) for the youth. According to reports, the tasty meaty flatbread costs on average €7.90 (£6.80) and increases with inflation, so called “donerflation”. So, with roughly 1.3bn kebabs consumed in Germany annually, the proposed subsidies would amount to ~€4bn. While Kathi Gebel, a member of the Left Party, calls for a cap on kebabs as a “cry for help!”, the nation’s Chancellor Scholz, who is regularly heckled on the subject, highlighted the “good work” the ECB has done in handling inflation.
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Alex Kitteringham
10th May 2024