Bank of England Holds Rates Steady Amidst Weakening Jobs Market and Rising Inflation

Bank of England's Monetary Policy Report

The Bank of England (BoE) maintained its Bank Rate at 5.25% yesterday. However, the voting record and Governor Bailey's comments suggest that rate cuts may be imminent. The vote was split 7-2 in favor of maintaining the current rate, with Dhingra and Ramsden advocating for a cut.

Rate Cuts on the Horizon?

The BoE's Monetary Policy Report lowered inflation forecasts, but the policy Summary highlighted uncertainties around the persistence of high services inflation and inconsistent ONS labour market data. Governor Bailey stated that a cut in June is neither confirmed nor ruled out. Stefan Koopman, our BoE observer, anticipates an August cut due to persistent services inflation and uncertainties surrounding the recent 9.8% minimum wage decision.

Global Central Banks Trending Towards Rate Cuts

Similar to the European Central Bank (ECB) and the Federal Reserve earlier this year, the BoE is hinting at upcoming rate cuts, pending further data. Central banks worldwide are discussing rate cuts before implementing them, echoing Abraham Lincoln's famous quote about spending time sharpening the axe before chopping down a tree.

Other Central Banks' Actions

Earlier this week, Sweden’s Rijksbank cut its rate by 25bps, the first in 16 years, and the Brazilian central bank also cut its rate by 25bps. The Reserve Bank of Australia maintained its cash rate at 4.35% despite a significant inflation surprise in Q1. We anticipate that the RBA will eventually succumb to economic realities and increase rates twice more this year, albeit reluctantly.

US Labor Market Weakens

In the United States, initial jobless claims this week were 231,000, significantly higher than the expected 212,000 and last week’s revised 209,000. This follows a series of disappointing data, including a below-expectation payrolls report, a drop in JOLTS job openings, and ISM reports showing employment contraction in both the manufacturing and services sectors.

Rising Inflation and Slowing Growth

Despite the weakening labor market, inflation appears to be rising, and growth has unexpectedly slowed to just 1.6% annualized in Q1. However, Jay Powell, the Federal Reserve Chairman, recently stated that he does not see any signs of stagflation in the economy currently.

Europe's Economic Picture

In Europe, the economic situation seems to be improving. PMIs indicate a faster expansion rate for Spain, France, and Germany, and Italian industry also continues to expand. Despite weak growth, it would be a bold claim to suggest that inflation has been completely overcome, even if it appears to be retreating at the moment.

Geopolitical Tensions

Geopolitical tensions, such as the ongoing Israel-Hamas conflict and potential tariffs on Chinese EVs, could introduce further economic shocks. Brent crude has stabilized around $83-84/bbl after recent tensions between Israel and Iran, but the conflict is entering a new phase that could introduce new regional instabilities.

Conclusion

In conclusion, despite numerous challenges, both stocks and bonds have risen this week. It seems that despite the bearish outlook, bullish investors are still making money. What are your thoughts on this situation? Share this article with your friends and let us know your views. Don't forget to sign up for the Daily Briefing, which is delivered every day at 6 pm.