City expectations on the timing of the first rate cut from the Bank of England were hardening around June today after latest GDP data showed the sickly UK economy only slowly recovering from recession at the start of the year.
Most analysts believe that the Bank’s Monetary Policy Committee (MPC) will not sanction the start of the rate cutting before then because of the risk of stoking up prices and wages again before inflation is fully conquered.
However, leaving it much later would threaten to undermine the UK’s revival from recession. The Bank’s rate has been at 5.25% since last August when the last of 14 consecutive hikes was ordered by the MPC to rein in an inflation boom triggered by severe post-pandemic supply constraints and the energy price explosion caused by the war in Ukraine.
The MPC next meets to make a decision on rates on March 21 but it is thought highly unlikely that a vote to cut will be made then.
Yesterday’s wages figures from the Office for National Statistics showed basis pay rising at an uncomfortably fast 6.1% in the November to January quarter.
Today’s GDP figures showed the economy returning to growth in January with a 0.2% advance, but its underlying performance is still weak with output falling 0.1% in the three months to January. City markets were placing the chances of a rate cut in May at about one in six with the odds of at least one move by June assessed at slightly higher than evens.
A cut would bring relief to millions of homeowners on variable rate or tracker mortgages and also to businesses buckling under the weight of debt, much of it taken out as emergency loans during the pandemic.
Suren Thiru, economics director at the accountancy body the ICAEW, said today’s figure bolsters the case for a summer rate cut.
He said: “While these figures suggest the UK is on track to exit recession this quarter, the squeeze from high interest rates and persistent labour shortages may mean that the recovery is more downbeat than the OBR is predicting.
“This data won’t alter the expectation that interest rates will remain on hold this month. With the economy struggling and inflation slowing, the case for loosening policy by the summer is growing.”
Susannah Streeter, head of money and markets, at Hargreaves Lansdown, said: “There is hope that with interest rate cuts eyed on a summer horizon, consumers and companies will continue to be more optimistic about the road ahead, and that the recession will be in the rear-view mirror. These figures are unlikely to be a game changer for Bank of England policymakers, with a June date now largely the earliest expected for an interest rate cut.”
But George Buckley, chief UK economist at Nomura, thought the MPC will stay cautious for longer.
He said: “If trend growth is much weaker than in the past then any given recovery in demand growth needs to be considered carefully as it could be more inflationary than in the past. It’s one reason why we think the Bank of England will be cautious, waiting until August to cut rates, and why there are risks to it doing less than the 125bp of cuts we expect.”
Russ Mould, investment director at brokers AJ Bell, said: “Investors want the UK’s recession status cast into the rearview mirror so they can focus on how potential looser monetary policy could provide relief to consumers and businesses, and in turn feed into greater economic activity.
“Sadly, that could take time to play out.”
