Market Report - 22/09/2023
Markets digest “Dovish BoE” ; Retail sales and weak PMI data send The Pound lower
Yesterday The Bank of England voted to leave UK interest rates on hold at 5.25%. This is the first time since November 2021 that UK borrowing costs have stayed on hold, the decision from the Bank’s Monetary Policy Committee came after Wednesday’s surprise fall in inflation.
MPC Meeting:
The Governor of the B.O.E, Andrew Bailey stated that “Inflation is falling, and we expect it to fall further this year. That is welcome news. Our previous increases in interest rates are working.”, while insisting that the Bank will keep interest rates “high enough for long enough” to get inflation down to its 2% target. “But let me be clear that inflation is still not where it needs to be, and there is absolutely no room for complacency.”
The MPC’s decision to hold rates was a split one, after it was revealed that the vote was 5-4 in favour of holding.
Governor Andrew Bailey, deputy governor’s Ben Broadbent and Dave Ramsden, external member Swati Dhingra and chief economist Huw Pill all voted to leave interest rates on hold. But four members preferred to increase Bank Rate by 0.25 percentage points, to 5.5% – deputy governor Jon Cunliffe, and external members Megan Greene, Jonathan Haskel and Catherine Mann.
The minutes stated: “Although there were now some signs of weakening economic activity, consumer sentiment appeared to be holding up, real household incomes had started to rise, and forward-looking indicators of output had remained positive. The labour market was still relatively tight, consistent with a possible rise in the medium-term equilibrium rate of unemployment, and the pace of loosening had been slow”
Further from the minutes: The Bank of England has lowered its growth expectations for the economy this year, after GDP fell by 0.5% in July. The minutes stated: “UK GDP is estimated to have declined by 0.5% in July and the S&P Global/CIPS composite output PMI fell in August, although other business survey indicators remain consistent with positive GDP growth. While some of this news could prove erratic, Bank staff now expect GDP to rise only slightly in 2023 Q3. Underlying growth in the second half of 2023 is also likely to be weaker than expected.”
Retail Sales:
On the economic data front this morning, UK retail sales data was released by the ONS.
Retail sales data showed volumes are estimated to have risen by 0.4% in August 2023, partially recovering from a fall of 1.1% in a weather-impacted July, but this was still below the analyst forecasts for growth of 0.5%. That being said, some predictions by analysts suggest that the worst might have passed for retailers as wages now outstrip inflation.
Sales volumes rose by 0.3% in the three months to August 2023 when compared with the previous three months.
PMI Data:
Following the release of this morning’s UK PMI data, the GBP extended a multi-week decline after survey data revealed the UK economy saw a marked slowdown in September that exceeds anything seen since the Covid lockdown period.
The composite PMI fell to 46.8 from 48.6 in August, undershooting consensus expectations for 48.7. A reading below 50 signals contraction and the findings are therefore consistent with an economy that has gone into reverse.
The headline figure was hinted at in the minutes from this week's Bank of England Monetary Policy Committee meeting and appears to have helped swing the MPC into voting to keep interest rates unchanged at 5.25%.
Following this release, the GBP/USD rate was quoted at 1.2246, down 0.40% on the day, and the GBP/EUR rate was at 1.1497, down 0.22% on the day. These losses build on the sizeable declines that followed Thursday's Bank of England decision – with many struggling to see a sterling rally in the immediate future.
Further losses for the pound are expected by analysts, as markets bet the UK is headed for recession and that the Bank of England will be decisive in cutting rates, potentially as early as May 2024, despite expectations for inflation to remain at elevated levels.