Scope for rate cuts as UK sees cyclical upswing: PGIM Fixed Income

by | Apr 10, 2024

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Written by Katharine Neiss, chief European economist at PGIM Fixed Income

In light of the recent UK data flow since the last Bank of England (BoE) policy meeting, my outlook for the UK is evolving. The UK is benefitting from a cyclical upswing, despite medium-term structural challenges. But the looming election opens the door to potential positive developments in this space. For example, Labour is incredibly focused on increasing house building, which has been perhaps the single greatest barrier to growth and public dissatisfaction.

More broadly, unlike prior elections, the eventual result is unlikely to make much of a difference from a macro perspective. Both major parties have made growth a priority and are committed to being fiscally responsible – a key lesson from the short-term Liz Truss leadership. Labour has also suggested it may make the OBR report a legal requirement

 
 

In terms of current positive economic drivers, inflation is projected to come down markedly in the coming months and from April it could be below 2% for the remainder of 2024. Wages have been strong, and the minimum wage is set to rise further, which will improve real incomes and provide a boost to consumption.

As for monetary policy, after raising rates early and swiftly beginning QT, the BoE has the scope to cut rates sooner rather than later. While a rate reduction in May is now a distinct possibility, rates are well above neutral, which means the BoE can make early and regular cuts and still be in restrictive territory when it eventually pauses.

Ahead of a first cut, later this week the BoE is expected to release the findings of the review undertaken by former Federal Reserve chair Ben Bernanke. The findings are expected to urge the BoE to eliminate the fan chart and set out a base case and a series of ‘scenarios’. Crucially, the BoE may be advised to hold a press conference after every monetary policy meeting, instead of the four meetings a year it currently conducts. The BoE has historically been firmly against creating a ‘dot plot’, a key tenet of the Bernanke-led Fed, so a change in this direction would represent a major shift for the BoE.

 
 

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