Bank of England keeps rates on hold but decision ‘finely balanced’
The Bank of England keep the bank rate unchanged, as expected, at 5.25% yesterday. However the minutes showed that for some members who voted to maintain the policy stance the decision was ‘finely balanced’ causing markets to price in a 50/50 chance of a rate cut at the next meeting in August. Sterling ticked up slightly post the meeting and is trading around 84.6p to the euro. The dollar did gain some ground yesterday both against the euro and sterling with the former trading down to just above $1.07 and the latter to $1.2660.
The MPC voted 7-2 to keep rates on hold at 5.25% yesterday with 2 members (Dhingra and Ramsden) preferring an immediate rate cut of 25bps. While inflation had returned to target in May the Bank still expects inflation to rise slightly in the second half of this year. Some members of the group of 7 voting to keeping policy on hold believed the high levels of services inflation would mean that second-round effects would maintain persistent upward pressure on inflation. For them, wage growth continued to exceed forecasts and indicators of domestic demand were stronger than expected and they wanted to see more evidence of diminishing inflationary pressures before reducing monetary policy restrictiveness. However, for others in the group of 7 the upside surprise in services inflation did not alter significantly the disinflationary trajectory and the policy decision was ‘finely balanced’. This caused the market to move in a first rate cut by the BoE from November to virtually fully priced in by September and a 50/50 chance of a cut at the next meeting in August. UK Government bond yields also ticked down with 2-year yields down c.4bps to around 4.10% this morning and 10-year yields down marginally to 4.05%.
The Philly Fed business outlook survey showed a dip to 1.3 in June from 4.5 in May when an increase was expected. The details showed that current activity indicators were stable but the index of future activity fell to 13.8 from 32.4, its lowest level for 4 months while the future shipments index also dropped sharply. The readings for prices paid and received rose further in June, to their highest levels since mid-2022. The survey suggests not only are businesses more pessimistic than they were about the outlook for the US economy they are also concerned about a revival in inflation.
Euro Area consumer confidence rose, just slightly, to -14.0 in June from -14.3 in May. Consumer sentiment remains on an upward trend from it lows in mid-2022 but is still at relatively low levels, with the index at below its long term average. The index has moved up for five consecutive months now and is at the highest rate for two years. With the ECB reducing rates, inflation moving down and real incomes rising the tailwinds are positive for consumers in the second half of the year.
There was a strong rebound in UK retail sales in May, increasing by 2.9% on the month following 3 months of declines, which left the annual rate at 1.3%. Consumers went back to the shops after a rainy April seems to dampen demand and the rise in consumption of goods was broad based. Consumer confidence in the UK has picked up to its highest level in three years as rising income and easing inflation has supported households in spite of softening in the labour market.
Minneapolis Fed President Kashkari, who is not voting on monetary policy this year, said that while he was ‘confident’ that inflation will return to the Fed’s 2% target it is likely to take a year or two to get there. He said that US economic fundamentals were ‘sound and strong’ though there was some softening ‘at the margins’. He said he was hopeful that growth would continue and the path of interest rate is dependent on the economy and he would like the Fed to communicate more clearly how it reacts to incoming data.
Economic data due today includes existing home sales in the US and early June PMI readings in UK, Euro Area and US. Speakers include Nagel and Simkus from the ECB