BoE Raise 25bps
Yesterday, the Bank of England met expectations by raising rates 25bps to bring the benchmark policy rate to 5.25%. Their latest decision marks the 14th consecutive rate hike and brings borrowing rates to fresh 2008 highs. This comes as the central bank continues attempt bringing down inflation which continues to remain well above their 2% target rate, at 7.9%.
Six members of the monetary policy committee voted to raise rates by a quarter of a percentage point, while two members votes opting for a more hawkish 50bps (in line with their last meeting in June). Here, the Monetary Policy Report stated that “some key indicators, notably wage growth, had surprised significantly on the upside. This could indicate that the medium-term equilibrium rate of unemployment had risen, and that some of the risks of greater persistence in broader domestic inflationary pressures had crystallised.” Meanwhile, one member voted to keep rates unchanged, with the MP report citing their view that “the risks of over-tightening had continued to build, increasing the likelihood of output losses and volatility that would require sharper reversals of policy”.
While Bailey suggested that further tightening would likely be needed, there were some dovish undertones to his press conference where the Governor stated that there was “more than one path” to cool inflation. Nevertheless, Bailey also brought some caution to the markets in maintaining that “it was too early to conclude that the economy was at or very close to a significant turning point”. With the benchmark policy rate at 5.25%, markets are considering whether rates will edge close to 5.75%. In characteristic fashion, Bailey stated that “if we get evidence of more persistent inflation then we will have to react to that.” Presently, according to implied money market expectations, there is around a 90% chance of a 25bps hike at Threadneedle Street’s next policy meeting on 21 September.
BoE Inflation Expectations
As markets considered the BoE’s monetary policy moving forward, markets weighed in on the central bank inflation expectations. Here, Threadneedle Street expects inflation to fall to around 6.9% over Q3 2023 and 4.9% by the Q4 2023, (a faster acceleration than had previously been expected). Of course, earlier in the year PM Rishi Sunak promised to bring inflation down by a half to 5.4%. As such, the Bank of England are now indicating that this target may be met, though concerns continue remain over global food inflation given recent events in Ukraine and the Black Sea. On a midterm view, policy makers are also forecasting inflation to fall to 2% by Q2 2025.
On growth, the BoE indicated that while they are no longer forecasting a recession, output will continue to sluggish. Growth in H1 2023 has been seen at around 0.2%, with the BoE seeing a similar rate of growth in the near-term. Such views are of course considerably more optimistic than their assessments last year which pointed to eight consecutive quarters of economic contraction (starting in Q4 2022). As such, now the UK – like many of its counterparts – is expected to ‘softer-than-expected’ landing.
At 12:30 this afternoon, attention will turn to US labour market data as investors consider the extent to which the Fed’s tightening cycle has impacted the jobs market. Here, the much-anticipated Nonfarm payrolls are forecasted to come in at 200,000, marking only a marginal slowdown from June’s print. While a print of 200,000 would mark the lowest level since January 2021, it nonetheless remains around double the level considered necessary to keep up with growth in the working-age population, and thus would still be indicative of the heat of the US labour market.
Elsewhere, US unemployment is projected to come in at 3.6%, unchanged from last month’s print. June saw unemployment slip 0.1 percentage points from a seven-month high of 3.7%, as the labour force participation level remained at its highest level since March 2020. Accordingly, with markets speculating on whether the Fed may raise rates again or whether their recent 25bps hike has brought policy rates to a terminal level, investors will be eagerly awaiting today’s print and the extent to which inflationary pressures remain in the labour market.
Yesterday, the budget UK retailer Wilko filed a Notice of Intention warning that they were on the verge of collapse after failing to find sufficient investment. This now puts 12,000 jobs and 400 stores across the UK at risk, and could be the largest UK retailer to go under since McColl’s last year (which was eventually recused by Morrisons). Over the past few months PwC has been working with Wilko as they attempt to find a buyer. Wilko’s Notice of Intention comes as retailers battle with rising interest rates, high energy costs, lower levels of discretionary spending and wider concerns over the health of the high street. As we looked at earlier this week, the shop vacancy rate has risen from 13.8% in Q1 2023 to 13.9% in Q2. Retail property vacancies were most acute in shopping centres where vacancies are at 17.8%, as consumers across the country put more volume through online shopping and mail-order services.
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