Amidst the recent global revaluation of inflation, Megan Greene, a steadfast MPC member, advocates for a proactive stance. Addressing concerns in Leeds, she calls for an upward adjustment of the Bank of England’s policy rate, cautioning against the potential risks of a too-conservative approach. Greene questions the assumed restrictiveness in the current monetary stance, suggesting it might be less robust than perceived, especially in scenarios of persistent inflation.
Validating Greene’s concerns, core and services inflation in the UK paint a complex picture. While the headline inflation rate recedes to 4.6%, services inflation remains elevated at 6.6%, attributed to domestically generated inflation tied to labour market dynamics. Recent labour indicators, including a 3.5% unemployment rate and a 7.9% 3-month annual growth in wages, align with this perspective. The BoE’s Decision Maker Panel survey forecasts a 4.4% inflation expectation for the next 12 months, maintaining a slightly diminished projection of 3.2% for the subsequent three years.
Despite a modest descent, these figures remain notably high. Catherine Mann emphasizes the need for services inflation to decrease from the current 6%-plus level to 3% for effective overall inflation management. The BoE’s distinct concern about domestically generated inflation within the UK, compared to the US or the euro-zone, sets the stage for potential policy divergence.
Looking ahead, market sentiment anticipates a 25 basis points cut by the BoE in August, diverging from the forecasts of the ECB and the Federal Reserve. This divergence in policy expectations leaves the EUR/GBP vulnerable to further depreciation, as recent evidence of accelerated declines in inflation influences the ECB’s stance.
Simultaneously, the GBP-USD pair exhibits modest strength, bolstered by hawkish BoE remarks and favourable data. Haskel emphasizes the need to prevent the economy from becoming entrenched in embedded inflation, echoing Greene’s caution against “doing too little.” Despite the hawkish tones from BoE officials, market sentiment leans towards expectations of three rate cuts by the end of 2024.
Today’s data presents a nuanced picture, with November’s house prices showing a third consecutive monthly increase, though still 2% lower than last year. The final manufacturing PMI for November improved to 47.2, providing a somewhat better outlook. However, continuous declines in production, coupled with downtrends in new orders and exports, temper the optimism. The market remains cautious, and while the overall narrative suggests improvement, challenges persist in the economic landscape.
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