The week ahead 17 June 2024 - A big week for the Bank of England
What to watch out for in the UK economy and property market this week.
This week the Bank of England Monetary Policy Committee (MPC) will hold its rate setting meeting with the decision to be announced on Thursday. The May inflation data will be released the day before and we are forecasting a fall to around 2.0%, which is the MPC’s target figure. The arguments for a cut are that both headline and core inflation are firmly established on downwards trajectories, and there is no little evidence of a second burst of inflation, like that seen in the US which has persuaded the Federal Reserve to leave rates on hold. Also, last week saw the release of data showing the public’s expectations on future inflation have fallen to a three-year low of 2.6%, down from 2.8% in February. This is important as inflation expectations shape future pay demands. The case against a rate cut is that core inflation at 3.9% is proving stubbornly high, while the latest nominal pay growth figure (ex bonus) was 6.0% in April, which is high.
The consensus forecast is that rates will stay on hold at 5.25%, in part due to the general election, which could make the MPC reluctant to do something that might become politicised. However, we believe the decision is now a coin flip, and that a surprise cut cannot be ruled out. While pay growth in the latest figures was strong, unemployment is rising and job numbers are falling, which should slow wages growth in the coming months. Moreover, it will be difficult for the MPC to justify keeping rates at a restrictive level when inflation is at or very close to the target level. If the Bank does not cut rates this week, then we believe an August reduction becomes highly likely, followed by another cut towards the end of the year.
Last week saw disappointing UK GDP data released, with month-on-month growth grinding to a halt, particularly for the retail and construction sectors. We doubt this will much influence the MPC’s rate decision though, as the slowdown was mostly weather-related and probably just a temporary lull. Our forecast remains for GDP growth to gain momentum in the second half of the year, thanks to lower inflation plus improving consumer and business sentiment.
Things to watch for this week
Tuesday, June 18th
ZEW Euro Area Economic Sentiment Index, June
Previous: 47.0
Forecast: 48.5
With inflation meaningfully reduced over the past months and the ECB having cut rates, we are expecting an improvement in sentiment.
Wednesday, June 19th
UK Inflation, y-o-y, May
Previous: 2.3%
Forecast: 2.0%
With base effects steadily dropping out the index we are forecasting another deceleration for inflation.
Thursday, June 20th
Bank of England Rate Decision, June
Previous: 5.25%
Forecast: 5.25%
Our central scenario is no change, matching the consensus view. However, we also believe the outcome if finely balanced and there is a chance of a surprise cut.
Friday, June 21st
Euro Area ‘Flash’ PMI, June
Previous: 52.2
Forecast: 51.8
It is too soon for this month’s ECB rate cut to have had an impact beyond sentiment, so we are predicting a small reduction in the PMI figure, albeit to a level well above the pivotal 50 mark.
