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Bank of England Hold Rates

Interest rates held by Bank of England, lower-than-expected UK retail sales, and contracting German PMIs.

Yesterday, the Bank of England’s Monetary Policy Committee held interest rates at 5.25%, bucking the trend of fourteen consecutive rate hikes seen since they stated their tightening cycle in Q4 2021. Here, five members voted in favour of maintaining the benchmark policy rate against four who voted to raise rates 25bps. Going into the print, given that markets were pricing in around a 50/50 chance that Threadneedle Street would raise, sterling came under considerable pressure. Looking ahead however, given the Monetary Policy Summary stated the BoE’s view that “further tightening in monetary policy would be required if there were evidence of more persistent inflationary pressures”, markets are now weighing on whether Threadneedle Street could conduct one more hike ahead of reaching a terminal rate.

The BoE’s decision to hold comes as UK CPI stands at 6.7%. Though this print marked the lowest level of headline inflation in 18 months, it remains well over three times above the central bank’s 2% target rate. Nevertheless, the BoE cited how “CPI inflation is expected to fall

significantly further in the near term, reflecting lower annual energy inflation, despite the renewed upward pressure from oil prices, and further declines in food and core goods price inflation.” As such, policy makers appear to remain cautiously optimistic that inflation will continue to fall, thus giving them the confidence to hold rates.

Yet, less optimism was given in relation to whether core inflation (which excludes the volatile food and energy items) would continue to fall. Here, the Bank’s monetary policy summary stated that “Services price inflation, however, is projected to remain elevated in the near term, with some potential month-to-month volatility”. While core dropped to its lowest level in five months, it remains less than 1 percentage point off May’s peak which was the highest level in 31 years. Thus, the UK economy is far from out of the woods when it comes to service inflation.

Regarding the BoE’s quantitative tightening, the MPC unanimously decided to reduce their balance sheet by £100 billion over the next twelve months, to a total of £658 billion.

UK Retail Sales

UK Retail Sales for August come in lower-than-expected this morning, marking the 17th consecutive contraction when looking at the annualised print. While this represented the slowest pace of contraction over this 17-month period, the fall is indicative of how spending habits have been affected by the rising cost of living. When looking at data from the ONS, month-on-month retails sales showed some sign of rebounding, though similarly missed market expectation as it hit 0.4%. The ONS cited the rising cost of living as a particular reason behind why sales volumes for department stores and other non-food stores, such as bookshops, both declined by 0.4%.

In contrast, food shops saw sales climb 1.2% – a marked increase from July’s fall of 2.6%, though as the ONS writes “despite this partial recovery, food stores sales volumes remained 4.1% below their pre-coronavirus (COVID-19) February 2020 levels, as retailers continued to indicate that the increased cost of living and food prices are affecting sales volumes”.

German PMIs Contract

This morning, preliminary data from the continent indicates that the HCOB Germany Composite PMIs dropped to 46.2 in September. While coming higher than the expected level of 44.8, the contractionary data is indicative of how the Eurozone’s powerhouse continues to face headwinds. This figure also followed last month’ print where PMIs fell at their greatest level since the pandemic in May 2020. Here, manufacturing came in at 39.8 (vs expected 39.5) while services marked a considerable miss, slumping from 46 to 43.9, against expectations of 46.

Commenting on the data, the Chief Economist at Hamburg Commercial Bank staid that “its no secret that the German manufacturing sector has been going through the wringer lately. The HCOB PMIs, however, indicate that things aren’t going downhill as fast as before, with the decline in new orders slowing down. In addition, the reduction in purchasing activity is losing momentum.” Dr. Cyrus de la Rubia continued by stating that “The HCOB Composite PMI confirms our view that Germany has entered once again into contraction during the current quarter, after the downturn at the tail end of 2022 and early 2023.”

All eyes now turn to Eurozone PMIs at 0900 ahead of UK and US PMIs at 0930 and 1445, respectively.

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