Before the most recent Monetary Policy Committee (MPC) resolution of the Bank of England (BoE), the market had anticipated that the base rate would remain at 5.25%. And that is precisely what transpired.
The MPC voting members were left with limited flexibility due to the fact that UK inflation continues to exceed the 2% target. Nevertheless, the vote was not unequivocal, as two of the seven voting members opted for a reduction in the current timeframe.
Investors’ primary concern was the MPC’s messaging, rather than the vote outcome. A first UK rate reduction is now anticipated for June, according to the current consensus.
Nearly there
Did you know that the base rate was last reduced by the Bank of England in March 2020? During that period, it plummeted to a mere 0.1%. Since that time, UK rates have progressively increased until the recent surge, during which the BoE scrambled to control the escalating inflation.
Until recently, the general consensus was that the US Federal Reserve (Fed) would establish the tempo for rate cuts among other major central banks, but a comparable pattern has emerged globally. Nevertheless, the European Central Bank may be the first to reduce monetary policy, followed closely by the Bank of England, as price pressures in the eastern region of the Atlantic calm more rapidly. The Federal Reserve may ease monetary policy later in 2024.
The latest messaging from the BoE for the UK was evident in its delicate balance between reiterating the necessity of monetary policy discipline (i.e., refraining from prematurely cutting) and reassuring that cuts were not far off (i.e., avoiding the risk that the economy would enter a doom loop in the absence of evidence of better times ahead).
According to the May MPC minutes, twelve-month CPI inflation decreased from 3.4% in February to 3.2% in March. In the near term, it is anticipated that CPI inflation will return to a level that is close to the 2% objective. However, it is anticipated that inflation will increase slightly in the second half of this year, reaching approximately 2½%, as a result of the unwinding of energy-related base effects. Despite the fact that the Middle East has had a limited impact on oil prices thus far, there are still upside risks to the near-term inflation outlook from geopolitical factors.
Volatility may spike
We anticipate four cuts in 2024, as indicated by the most recent MPC meeting. It may take several months before UK inflation returns to the 2% target.
The Federal Reserve’s delayed initial reduction may result in a more turbulent trajectory in the United States. Fed chair Jerome Powell stated, “It is likely to take longer for us to gain confidence that we are on a sustainable path down to 2 percent inflation (2).”
Some investors may react in a knee-jerk manner to every piece of market data that is released in an effort to second-guess the Fed due to the interval between now and the first US cut. It is conceivable that market volatility may experience a surge in such circumstances.
In the event that this occurs, it is crucial for investors to maintain their attention on their long-term objectives and avoid becoming distracted by short-term market fluctuations.
Final thoughts
The global struggle to control inflation since 2022 has been characterized by a lack of consistency, and the final stretch is proving to be more extensive than some had anticipated. Nevertheless, there is now a glimmer of hope at the end of the passage, and the path to a lower-rate environment is within reach.
For the time being, it is beneficial to remember the message of investing, maintaining an investment, and diversifying one’s portfolio.