Ongoing disinflationary pressures are gaining momentum, thereby clearing the path for the beginning of the rate cut cycle. However, the timing of such cuts appears to be slated for summer, requiring further patience. The focus now shifts to the pace of the monetary easing and stickiness of services inflation will be key.
Two become none. Unlike the Swiss National Bank’s announcement of a surprise quarter-point rate cut last Thursday, the Bank of England merely held interest rates steady, at 5.25%. But make no mistake, the first Bank Rate cut looks to be fast approaching. The last two hawkish dissenters on the Committee finally fell in line with the majority position: 8 votes hold to 1 cut. Tweaked guidance also clarifies that cuts will be given active consideration at each upcoming meeting. Timing remains data dependent; key metrics being services inflation and wage growth. Financial markets reacted by increasing bets on a June rate cut and fully pricing three 25bps reductions by year end.
On track. The S&P Global UK composite PMI eased back to 52.9 in March from February’s 9-month high of 53.0. This remains consistent with GDP rising by around 0.25% QoQ in Q1. The Services PMI fell to 53.4 from 53.8, while the manufacturing PMI increased to 49.9 from 47.5, marking a 20-month high. Firms reported elevated wage pressures as the main cost driver, with the prices charged index of the services holding at 58.4 in March. However, it remains likely that the CPI will fall to a sub-2% rate in Q2, driven by falling energy prices, ensuring that the MPC can start cutting rate later this year.
Underwhelming. February’s UK inflation figures offer relief, bringing the country closer to the US and euro area levels after experiencing the highest G7 inflation last year. CPI inflation decreased to 3.4% from January’s 4%, slightly below both the consensus (3.5% y/y) and Bank of England’s projections. The main contributors to the subdued growth were food (5%) and restaurants/hotels (6%), hitting their lowest rates since January and February 2022. Core goods inflation saw a decline to 1.1% from January’s 1.8%. However, services inflation remains stubborn at 6.1% YoY and will stay on the Bank of England’s watch list.
Brightening outlook. Rising consumer confidence, easing inflation concerns, and robust retail sales signal a positive trajectory for the economy. GfK’s consumer survey shows a 28-month high confidence reading in personal finances, yet the overall index – which gauges both personal finances and broader economic prospects— remains steady after a year of almost continual increases, reflecting lingering consumer caution regarding inflation. Q1 is poised for a robust rebound in retail sales volumes, aiding the economy’s recovery from last year’s recession. Expectations suggest continued consumer spending growth driven by real income increases as inflation slows, low unemployment and a fading drag from interest rate hikes.
Turning point? In January, UK house prices experienced a moderate 0.6% YoY decrease, contrasting with December’s steeper 2.2% decline. Various other metrics paint a more positive picture of the property market. Each indicator captures a distinct aspect, sometimes leading to differing narratives about market trends. The Nationwide house price index, tracking prices via mortgage approvals, has surged by 2.6% since August. Additionally, Hallifax index climbed for the fifth consecutive month, reaching 1.7% YoY in February, down from the previous month’s 2.3%. Conversely, the Rightmove index, gauging asking prices rather than sales, recorded a seasonally adjusted 1.1% increase over the last two months. The shift to a less restrictive interest rate outlook has reignited buyers’ interest and activity this year, though concerns linger over potential uncertainties as the slowdown in mortgage rate drops persists.
Manufacturing (dis)consent. The clear divide in business activity between Eurozone and US firms continues. At heart the fault line lies between US manufacturers and their German and French counterparts. But the good news first. US business activity remains healthy, with March’s ‘flash’ composite PMI at 52.2 (Feb 52.5) and manufacturing reaching 54.9, the highest since the post-lockdown spurt. And the Eurozone is stabilising, a whisker off the magic 50 (49.9). But it’s an economically divided union, as falls in Germany and France, concentrated in manufacturing output, weighed on growth elsewhere. Price inflation remains sticky though. Something uniting the two economic continents.
Summer cutting. The Bank of England isn’t the only central bank pivoting in the direction of a mid-year rate cut. Eyes were focused on last week’s Fed meeting and specifically whether members would anticipate fewer rate cuts this year (illustrated in the Fed’s dot plot). The result was no change: the median forecast remained three cuts this year. Markets reacted by becoming more convinced of a June cut, pricing an 85% probability of a move by then, compared to 65% previously. But the forecast refreshes did reveal some new thinking: more Fed members believe the neutral rate of interest has moved upward, meaning it will take higher rates to exert a given level of restrictiveness on the economy.
Sayonara. From rate cuts to rate hikes as the Bank of Japan (BoJ) waved goodbye to 8 years of negative interest rates by raising its reference rate to 0-0.1% last week. It also ended its policy of yield curve control, where it bought long term Japanese government bonds to hold their yields below specific rates, such as 1%. So, has monetary policy succeeded? Celebrations would be premature. Whilst inflation is above target and wage rises are substantial it has taken a truly global episode of high inflation to enable the BoJ to meet its policy goals. This suggests there’s relatively little changed in the Japanese economy to prevent inflation from falling below target in the future.