Morning Update

Yesterday, the Bank of England beat market expectations by raising rates 50bps. This marked Threadneedle Street’s 13th consecutive rate hike, and brought the benchmark policy rate to 5%, reaching fresh 2008 highs. The decision came after seven members voted for a half-percent rise with the BoE’s monetary policy statement stating that “there had been significant upside news in recent data that indicated more persistence in the inflation process, against the background of a tight labour market and continued resilience in demand”.

This came in contrast to the two members (Swati Dhingra and Silvana Tenreyro) who voted to keep rates unchanged. The monetary policy statement cited easing energy prices and the time lag in the effects that monetary tightening has on the economy as they key reasons for their decisions. In the case of the latter, the report stated that they considered how “sizable impacts from past rate increases were still to come through”. As such, given concerns around over-tightening, the two opted to hold the base rate at 4.5%.

The BoE’s decision follows Wednesday’s hotter-than-expected inflation print which saw Headline inflation remain at 8.7% over May on an annualized basis. Despite energy and food prices subsiding, this headline figure came in 30bps above expectation. Meanwhile, core inflation appreciated to 7.1% as it similarly beat market expectations by 30bps while reaching its highest level since 1992.

Sterling came under some pressure as markets weighed on recessionary fears. Chiefly, these recessionary fears had been driven by markets weighing on the prospect of tighter monetary conditions lasting for longer-than-expected. For example, with money markets upwardly their terminal rate expectations to 6% (by Q1 2024) investors weighed on the adverse implications that it would have on mortgage holders, household spending, businesses investment, and government tax and spend.

UK retail sales rose higher-than-expected this morning having increased 0.3% on a month-on-month basis for May. This beat market expectations of a 20bps contraction and came after a 0.5% rise in April and a 1.2% fall in March. The ONS cited warmer weather towards the second half of May which drove up spending on outdoor-related products and summer clothing, especially in the online space. Food sales saw a 0.5% contraction however, as the soaring costs at the supermarket hit households’ spending.

Accordingly, PwC’s head of retail Jacqueline Windsor stated that “seemingly the only winners were online sales, which rose to 26.5% of overall sales, as shoppers chose to spend from the comfort of their homes”. She continued by stating that “May’s retail sales numbers suggest that the UK consumer is far from out of the woods yet. It’s almost inevitable that consumers will rein in their discretionary spending over the rest of the year”… not least as rates continue to rise.

While retail sales rose on a monthly basis, when looking at data on an annualised basis, contracted by 2.1% marking the 14th consecutive month of decline.