5min read
Published on: May 10, 2024
#Daily Brew
#Financial Markets
The Bank of England (BoE) has kept the interest rates unchanged at 5.25% for the sixth time in a row, with no end to inflation in sight.
The Monetary Policy Committee, a key decision-making body at the BoE, voted 7-2 to keep the rates unchanged. The bank's decision is based on a careful analysis of encouraging economic data and the need for long-term low inflation.
Source: X
Though inflation in the UK has fallen to 3.2% in March 2024, its lowest level since September 2021, the central bank expects it to come down to 2%. This is a significant improvement from mid-2022’s peak of 11%.
Recommended Read: Inflation Explored
Source: Bank of England
As the chart above shows, inflation began to rise in the UK in 2020, similar to other parts of the global economy, due to a global breakdown in supply chains caused by the COVID-19 pandemic. Geopolitical tensions in Europe have also played a role in the UK's inflation story, with little to no improvements for nearly four years. Hence, the BoE has indicated that it will wait for inflation to fall before lowering interest rates.
Many economists expected a cut to the interest rate as early as June 2024, when the next meeting is due. However, this is not certain. BoE Governor Andrew Bailey said,
“It's likely that we will need to cut bank rates over the coming quarters and make monetary policy somewhat less restrictive over the forecast period - possibly more so than currently priced into market rates.”
The BOE’s decision is similar to the one the Federal Reserve took in the United States. Early this month, we reported that the Fed decided to keep interest rates steady within the policy range of 5.25%-5.50% due to a “lack of further progress” on inflation.
The positive news is that the UK economy has finally emerged from inflation. The latest data by the Office for National Statistics (ONS) suggest that the GDP in the UK grew by 0.6% during the Q1 2024. Moreover, services grew by 0.7%, the production sector grew by 0.8%, while the construction sector fell by 0.9%.
Chancellor of the Exchequer Jeremy Hunt said that the latest figures are "proof that the economy is returning to full health for the first time since the pandemic.” Note that the UK slipped into recession in February 2024 due to low productivity.
As per the ONS, the UK’s GDP shrank by 0.3% during the fourth quarter of last year. The country’s economic performance during Q4 2023 was the worst since the global financial crisis 2007-08, excluding the COVID-19 period.
Recommended Read: Revisiting the Global Financial Crisis
The BoE's decision has instilled a sense of reassurance and confidence, leading to a positive impact on the Financial Times Stock Exchange 100 Index (FTSE 100), which grew by 0.4% and closed on 9th May at 8,381.35 points. On 10th May, the FTSE 100 recorded an all-time high (ATH) as it rose past 8,420 points at press time.
Source: London Stock Exchange
The UK is set for the next general elections by early 2025, and the economy will be a major battlefield for the incumbent Tories and the Labour opposition. The outcome of the elections could have significant implications for the UK's economic policy, and investors and economists will be closely watching the election campaign for any hints about the future direction of the country’s economy.
This article is for informational purposes only and not intended as investment or financial advice. It contains opinions and speculations that are subject to change without notice.
The author and publisher disclaim any liability for decisions made based on the content of this article. Readers are advised to conduct their own research and consult a financial advisor before making investment decisions.
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