Tag: UK

Will the UK’s Inflation Figures Strengthen the Bank of England’s Hawkish Bias?

The latest data released by the ONS (Office for National Statistics), shows the United Kingdom’s inflation rate, the CPI (Consumer Price Index), jumped to 3.5% from 2.6% in April of this year, driven mainly by increases in water, energy and other price increases. Service inflation was seen accelerating from 4.7% to 5.4% and is an area the Bank of England watches closely for signs of underlying price pressure, and Bank officials had expected this figure to be 5%. Elsewhere Core Inflation (does not include food and energy) climbed to 3.8% which is the highest it has been since April 2024. Earlier this month, the Bank of England’s MPC (Monetary Policy Meeting) voted on yet another rate cut where two members voted to hold rate cuts, and the above figures bear out their cautiousness.

The Bank of England’s target inflation figure is 2%, and the current rate of inflation is well above that target and furthermore, the Bank of England expected this figure to rise and peak at 3.7% in September of this year. Other data shows consumer prices rising by 1.2%, the biggest rise for 24 months. Consumers in April were hit with a number of increases such as volatile air fares (up 16.2% year on year), water bills, local authority taxes, train fares and an across-the-board basic cost increase, which added to a pretty damning April for the government. However, analysts have noted that the Easter holidays were probably responsible for the jump in airfares (biggest month-on-month jump for April on record) and expect this figure to diminish before the summer holidays begin.

Experts suggest the financial markets are in favour of an end of year interest rate of 4% for the first time since the end of March/early April. This sentiment translates into one more rate cut this year suggesting that the Bank of England’s MPC will slam the door shut on an interest rate cut at its next interest rate meeting on Thursday 19th June 2025, with traders cutting an August interest rate cut from 60% to 40%. Markets also remember comments from the Bank of England’s Chief economist, Hugh Pill, who voiced in a hawkish speech that he feared interest rates were not high enough to keep the lid on inflation, and analysts suggest that it would not take too much for the swing voters on the MPC to move into the hawk’s camp especially after what the Consumer Price Index had recently shown.

Indeed, Mr Pill voted against a rate cut of ¼ of 1% earlier in May where he also said, “In my view, that withdrawal of policy restrictions has been running a little too fast of late, given the progress achieved thus far with returning inflation to target on a lasting basis. I remain concerned about upside risks to the achievement of the inflation target”. We will wait on the MPC’s meeting in June but the likelihood according to experts is a rate hold, plus we will also wait and see if Donald Trump’s economic policies impact further the global economy with any fall-out influencing decisions taken by bank officials. Elsewhere in April, it has been revealed that government borrowing for the month was £10 Billion, with data confirming this figure to be a new record. All in all, not the best 30 days with newspapers dubbing the month as “Awful April”.

Bank of England Cuts Interest March 2025

On Thursday 7th February 2025 the BOE (Bank Of England) cut interest rates by 25 basis from 4.75% to 4.5% with the MPC (Monetary Policy Committee) voting 7 to 2 in favour of the cut. The two dissenting external policymakers Swati Dhingra and Catherina Mann (she has been the most hawkish member of the MPC), voted for a full ½% or 50 basis point cut, whilst the remaining members voted for the smaller cut. The signals coming out of Threadneedle Street were that of a more careful and gradual approach to future rate cuts with suggestions they needed only two more rate reductions to reach their benchmark target of 2% inflation. 

However, in yet another blow to the somewhat beleaguered Chancellor Of the Exchequer the BOE has halved its projections for growth in 2025 to 0.75% citing the impact of the 2024 Autumn Budget, which will reflect weaker consumer and business sentiment and increased sluggishness in growth. In further bad news for the Chancellor, policymakers advised the possibility of a stagnating economy and rising unemployment thanks to a GBP40 billion tax raid that will hit the lower paid workers the hardest. If that was not enough, the BOE also advised that later this year inflation will rise to 3.7% compared with the projection of 2.8%. 

Due to these latest projections the Chairman of the Bank of England reaffirmed “The importance of taking a gradual approach to the withdrawal of monetary policy restrictiveness”. Despite the short-term increase in inflation policymakers still anticipate two further reductions in interest rates though financial markets have, according to experts,factored in three rate cuts for 2025. Yet despite on-going inflationary pressures, comments from the MPC suggest a deteriorating job market and weakening growth means inflation should recede in the future but it won’t be until 2027 that the benchmark target figure of 2% will be reached.

The economic outlook is now worse for the United Kingdom since the last full set of figures were announced by the BOE in November 2024. Analysts advise if the forecasts coming out of Threadneedle street if taken at face value suggest that in 2025 there is only room for one rate cut, but as mentioned above the financial markets have taken a differing view. Elsewhere the pound plunged 1.1% against the US Dollar to $1.237 however, by the end of the day it had recovered by 0.6% to trade at $1.244 and against the Euro the pound fell to around 83.74 pence compared to earlier trading of 83.40 pence. 

Finally, when asked if the word “careful” which has been added to the BOE’s core guidance for rate cuts in the future reflected uncertainties and questions with regard to the global economy, Chairman Bailey “We live in an uncertain world, and the road ahead will have bumps”. A cautious answer, but perhaps a finger pointed at President Trump and his potential tariffs leading to a trade war.

Will the United Kingdoms’ Interest Rates Fall Soon?

The financial markets are betting that, despite the negative comments by the heads of the European Central Bank (ECB), the Federal Reserve and the Bank of England, interest rates will fall in the first three to six months of 2024. The loudest negative voice pouring cold water on interest rate cuts is the Governor of the Bank of England, Andrew Bailey.

With the United Kingdom economy flirting with recession and inflation falling below 5% everyone from the Prime Minister downwards to first-time home buyers are saying that interest rates must surely fall soon. Indeed, recent data released from the British Retail Consortium showed inflation dropping to 4.3% in November of this year (a drop of 0.9%), the lowest level since June 2022. 

Despite the good news regarding inflation, after a visit to the North-East, the Governor of the Bank of England said interest rates will not be cut in the foreseeable future. On top of that he reiterated the same point that was made after the last MPC (Monetary Policy Committee) meeting, that it is too soon to have this conversation, which is the Bank of England speak for “go away”. 

The 2% benchmark figure for inflation will not be reached until the end of 2025 as advised by the Bank of England itself. So, whilst the Prime Minister Rishi Sunak has met his political promise of halving inflation, from an economic standpoint it has little significance. Indeed, inflation has dropped from a high of 11.1% in October 2022 to 4.6% in October 2023, but Andrew Bailey has advised that halving it once again could be very difficult. 

The Bank of England are quick to point out that much of the recent falls in the inflation figures are due to falls in Ofgem’s energy price cap, as the spikes caused by the war between Russia and Ukraine come out of the inflation figures. However, to do this again and again would surely be nigh on impossible or exceptionally difficult. The Governor also pointed out that to get to the 2% inflation target is a game of two unequal halves. He went on to say the second half is “hard work” with the remaining task being done by restrictive monetary policy. He further added that the drop in inflation by 2% from 6.7% in September to 4.6% in October, (due to the fall in the energy cap as mentioned above) will not be repeated again.

Interestingly, one highly respected financial institution has advised that their experts are now predicting a 50 basis point interest cut in the fourth quarter of 2024. They went on to say that with the loosening in the labour market interest rates may be reduced by the Bank of England earlier than predicted but expect the bulk monetary easing to take place throughout 2025 culminating in the 2% interest rate target. There are obviously differing views within the financial markets as to when interest rates will be cut, but for first time home buyers and those households struggling with bills and mortgage repayments, the sooner the better.