Please see below ‘Daily Update’ article received from EPIC Investment Partners earlier this afternoon, which provides global economic analysis.
The Bank of England (BoE) maintained interest rates at 5.25%, as widely anticipated, despite headline inflation reaching the 2% target in May. Governor Bailey said: “It’s good news that inflation has returned to our 2% target. We need to be sure that inflation will stay low and that’s why we’ve decided to hold rates at 5.25% for now.”
The BoE’s primary concern, mirroring its US counterpart, is persistent service inflation, which only marginally decreased to 5.7% from 5.9% in April. The central bank attributed part of these increases to regulated prices and volatile components, rather than underlying inflationary pressures.
As in the previous meeting, seven Monetary Policy Committee (MPC) members favoured maintaining rates, while two advocated for a 25bps cut. However, this decision was described as “finely balanced,” suggesting a more nuanced discussion around potential rate cuts.
The MPC meeting minutes revealed stronger-than-expected economic growth, the BOE forecast 0.5% GDP growth in Q2 2024, up from the 0.2% projected in May. This growth, partly driven by increased government spending, marks a clear recovery from last year’s recession. However, MPC members expressed concerns about persistent wage growth potentially leading to further price increases, and the risk of rising energy prices in autumn contributing to higher inflation.
The MPC’s subtle shift in guidance, focusing more on the August forecast round rather than immediate data releases, indicates a more forward-looking approach. This change suggests the committee may be becoming less reactive to short-term data fluctuations and more focused on broader trends.
Barring significant surprises in June’s inflation data, the BoE could commence its easing cycle in August. Markets are currently pricing in a ~70% chance of a cut in August, up from ~30% ahead of the BoE announcement.
The upcoming change in MPC personnel, with Broadbent’s departure and the more hawkish Clare Lombardelli’s arrival, introduces an element of uncertainty that could influence the timing of the first cut.
In other news, the Swiss National Bank (SNB) reduced rates by 25bps to 1.25%, marking its second cut this cycle. Unlike many Western countries, Switzerland’s inflation has fallen below 2%, stagnating at 1.4% in May. Of note, the SNB expressed willingness to intervene in the foreign exchange market, given the recent surge in the franc amid European political uncertainty.
Remember our Net Foreign Asset (NFA) model that we use to predict Euro success? Well, it’s been a mixed bag. While the wealthy nations have largely triumphed, a few upsets have left our Fixed Income team scratching their heads. Belgium (6 star NFA) fumbled against Slovakia (2 star), but they’ve got another shot at glory against Romania (2 star) this weekend. Meanwhile, our model suggests the Netherlands (7 star) should outshine France (3 star) tonight, despite the latter being one of the tournament favourites. Will the Dutch make it rain Oranje, or will the French prove that football prowess is not about wealth?
Please check in with us again soon for further relevant content and market news.
Chloe
21/06/2024