Will the Bank of England park the bus?

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This is the second time we’ve used “squeaky bum time” in a headline recently, and it’s proof that the Bank of England has had a rough 12 months.

When the Monetary Policy Committee makes its next interest rate decision on September 21, it will be almost a full year since the mini-budget spawned one of our favorite Wikipedia articles:

It’s fair to say that things have calmed down a bit, even more comfortably, since then: a spate of inflation overshoots has been weighing on the MPC (while providing some relief on the monetary front).

Now, after 14 consecutive rate hikes, the end may finally be in sight. As Governor Andrew Bailey told lawmakers yesterday:

It seems to me that there has been a period of time when it has become clear that interest rates need to be raised. . .The question we have is how much and in what time frame but I don’t think we are at that stage anymore

I think we’re now closer to the top of the (interest rate) cycle.

Markets seem to agree for now – according to Bloomberg’s WIRP estimates, at pixel time, they’re pricing in about an 80% chance of a 25bp rate hike:

…which means it’s September and it’s over.

Data contexts are interesting. A narrative shift in last Friday’s ONS GDP data changed everything and nothing.

It’s very interesting that members of the Monetary Policy Committee of the Treasury Board are bemoaning not knowing that GDP will be revised up at that time…

short memory

At the time it was higher — it was downregulated and then up again.They had (roughly) the correct data at the time

— Chris Giles (@ChrisGiles_) September 6, 2023

From what we’ve seen from the sell side, there’s broad satisfaction with the eventual alignment of growth and a strong labor market, with repeated warnings that (re)discovering historic growth will only mean a worse outlook for now. .

As Konstantinos Venetis of TS Lombard puts it:

…the positive output “level effect” has not translated into a corresponding increase in tax revenue and therefore does not make the UK’s fiscal position increasingly difficult The calculation is made easier as the prospect of “longer periods of higher (or even higher)” interest rates exposes the public sector’s rising debt burden.

Nor does it change the cyclical deterioration: the economy is losing steam and real GDP will be flat this year as the lagged effects of the Bank of England’s rate hike cycle inevitably start to kick in.

Recent PMI surveys reinforce the sense that a recession may finally be here:

It’s still very much within reach. Economists at Nomura now say the euro zone will fall into recession, and they see only a 40% chance of the same fate for the UK. They write (our paragraph breaks):

What makes the UK different? Overall, a number of factors mean that the UK may fare slightly better relative to the euro area:

(1) Perhaps most importantly, the Bank of England’s survey of credit conditions showed that businesses and households were much more resilient in the face of a tightening cycle in UK monetary policy, with firm demand for loans reportedly taking little hit.

(2) Excess saving is higher in the UK, implying that households have a stronger buffer against the impact of higher interest rates. However, these savings may indeed be in the hands of high-income groups with lower marginal propensity to consume.

(3) Regular wage growth in the UK private sector is much higher, likely supporting consumption more.

(4) The UK’s recent budget results are better than expected, and the UK government has more concrete fiscal easing plans ahead of the possible general election next year, while there is still great uncertainty in the euro zone over the timing of the payment and use of NGEU funds.

(5) Despite recent upward revisions to UK GDP growth during the pandemic, the UK’s post-pandemic performance remains weaker than many other countries, suggesting that there is still greater potential for UK GDP to catch up.

(6) Finally, historically, the UK economy has tended to grow faster than the Eurozone.

These positives are contrasted with the scale of the austerity that has occurred, rising UK inflation, austerity policy and the much more pronounced hit to the UK labor market from Brexit.

Against this backdrop, the MPC’s next move appears delicately balanced. Inflationary pressures could last longer than currently expected if sterling falls, but sterling is likely to be. . . OK? Here’s Rabobank’s Jane Foley reporting:

While UK data is still far from robust, it is clear that the UK economy has significantly outpaced consensus forecasts for the last year.

Thanks to Swati Dhingra (whose Annual Report to Treasury Select Committee, posted yesterday, reads rather tragically). But Huw Pill and Ben Broadbent are better leaders, and both have sounded relatively hawkish in recent speeches.

After all, there are reasons to be more optimistic about the UK’s economic outlook. Here’s what Berenberg’s Kallum Pickering said in a report published today:

In stark contrast to the general pessimism hanging over the UK economy, business capital spending is growing fast. Business investment fell sharply after the Global Financial Crisis (GFC) and stalled after the Brexit referendum due to political uncertainty. It then took another hit during the COVID-19 pandemic. Weak capital investment hampers productivity, limits supply potential and leads to cost-push inflation.

But things are improving. As shown in Figure 1, business investment surged 35% from its low point in the second quarter of 2020. By the second quarter of 2023, this figure is 6% above the pre-Brexit referendum high. Capital spending has now returned to pre-GFC trends, although the rebound has not been able to offset the cost of the post-2016 investment gap. With any luck, a rebound to the old trend could be a sign that UK growth potential is picking up after six years of deterioration.

Somewhat ironically, Pickering points out, one of the factors that could undermine this positive trend is fears of a recession – in other words, UK growth may be at a point where “there is nothing to fear but fear itself.” ” stage.

It’s yet another unenviable position for Bailey and his gang, whose decisions could be vindicated or damned in the months to come.

Given the current circumstances, we believe that the MPC is likely to park the bus This month: Play defense with the last 25 basis points and wait for the whole thing to pass.

further reading
– Some pointless charts about the Bank of England’s Monetary Policy Committee

Svlook