Sharing her expectations for interest rates following June’s MPC meeting taking place tomorrow, Henrietta Walker, Head of Investment Specialists and Brooks Macdonald, said:
“We are not expecting the MPC to rock the boat at Thursday’s meeting. Instead, the focus will be on the votes of individual members. At the last meeting, two members, Ramsden and Dhingra voted for a cut, while the others voted no change – with the same result widely expected at this meeting. If we get this outcome, no significant market reaction is expected.
“Investors will be more interested in the MPC’s forward guidance (which accompanies the decision) for any change to the comments compared to the previous meeting, in which the need to remain ‘restrictive for an extended period of time’ was repeated. A departure from this one way or the other would have the potential to move markets.
“The first cut is not fully priced in until November, with the market divided between a single cut for this year, or two cuts in Q4. For now, the ‘higher for longer’ outlook is prevailing.
Walker goes on to look at key takeaways from the recent economic indicators and what can we infer about the strength of the UK economy (e.g. wage growth) saying:
“Data released today showed headline UK CPI falling to 2.0% (year on year) in May – hitting the Bank of England’s target for the first time since July 2021. This number benefited from a downward contribution from food, but with Core CPI (excluding energy, food, alcohol and tobacco) at 3.5% (vs 3.9% in April). While these numbers were in line with estimates, services inflation remains stubbornly high, coming in above expectations at 5.7%, so it’s unlikely that the MPC will feel the battle with inflation has been won and are most likely to opt to hold rates where they are tomorrow.
When it comes to forecasting the BoE’s long-term strategy compared to the ECB and Fed, Walker said:
“In the US, May’s nonfarm payrolls were very strong compared to expectations. The first fully priced in-rate cut for the US is expected in December, a very long way from predictions at the turn of the year for March. On this basis, it appears that some degree of divergence in monetary policy between the US and other advanced economies is likely in the short term.
“The ECB was the first to blink last week, cutting ahead of the Fed and the MPC. Described as an ‘unhappy’ rate cut, due to dissent among members, as ECB inflation projections for 2024 and 2025 are currently above target. On this basis, we are unlikely to see many further ECB rate cuts in the short term.”
