Keep in mind:
- BoE kept rate stable, aims for 2% inflation target.
- The UK’s economic growth falls short of its capability, main to a upward push in slack.
- The Monetary Policy Committee (MPC) anticipates the Consumer Price Index (CPI) to stabilize, supporting the continuation of a stringent financial policy.
After their latest meeting on May 8th, 2024, the Monetary Policy Committee (MPC) of the Bank of England has decided to maintain the Bank Rate at 5.25%. The decision, supported by a 7-2 vote, is part of ongoing efforts to achieve the central bank’s 2% inflation target, despite challenging domestic growth and numerous global economic conditions.
Outlook for Domestic and International Economy:
In comparison to the Eurozone, the United States has experienced stronger global economic growth. Despite a slight slowdown, inflation pressures in the US have not decreased as much as anticipated, leading to an increase in forward interest rates which have affected other countries, including the UK. The UK economy is showing modest signs of recovery at the domestic level, with a growth rate of 0.4% in Q1 an expected 0.2% in Q2 of 2024. However, growth rates are projected to remain below potential supply growth, introducing a margin of economic slack that could persist into 2025.
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In March, the Consumer Price Index (CPI) inflation in the UK slightly decreased to 3.2% from 3.4% in February. The forecast predicts that CPI will soon approach the 2% target, but there may be a slight increase later in the year due to the phasing out of certain energy fee caps. Labor market conditions are showing slight improvement, but still indicate a tight market historically, with annual average earnings growth declining to 6.0%.
Despite the current economic slack, the Monetary Policy Committee (MPC) projects that CPI inflation will stabilize around 1.9% in two years and further drop to 1.6% in three years, based on current market interest rates. The committee has emphasized the importance of maintaining a restrictive monetary policy to ensure that inflation steadily returns to the 2% target, given potential persistent inflation risks.
Given the MPC’s commitment to a restrictive monetary policy and the emerging economic slack, the market outlook remains cautiously bearish in the short term. Traders should closely monitor upcoming economic data releases, as these will affect the MPC’s ongoing assessment of inflationary pressures and possible changes to the Bank Rate. The stance suggests a cautious approach to inflation control, with the potential for policy tightening if inflationary pressures do not recede as projected.
