The Week Ahead (12-16 May): Rate cuts and more trade talks

The major two macro events in the UK this week were the Bank of England rate cut and a “breakthrough” trade deal with the United States.

Firstly, on the rate cut (from 4.5% to 4.25%): this was expected by markets, but nevertheless markets are having a tough time predicting the views of the Bank of England, and the course of future monetary policy.

According to Reuters, no economist polled by them expected any vote against a rate cut - but there were two such votes in the 9-member Monetary Policy Committee. Two other members wanted a bigger cut, down to 4%.

In the summary of its decision, the MPC noted that CPI inflation had recently fallen from 2.8% to 2.6%.

This inflation rate is still above the Bank’s 2% target, which you might naively assume would inhibit rate cuts.

However, the MPC is expecting inflation to fall later this year.

With inflation thought to be on a downward path over the next year, rates can follow, although with some caution. Policy will be “restrictive” until risks to this view have dissipated:

Based on the Committee’s evolving view of the medium-term outlook for inflation, a gradual and careful approach to the further withdrawal of monetary policy restraint remains appropriate… Monetary policy will need to continue to remain restrictive for sufficiently long until the risks to inflation returning sustainably to the 2% target in the medium term have dissipated further.

In general the commentary took a mixed tone, and while it's reasonable to assume that there will be an overall downward trend in rates, the MPC does not want us to take this for granted:

Monetary policy is not on a pre-set path. The Committee will remain sensitive to heightened unpredictability in the economic environment and will continue to update its assessment of risks.

Markets continue to expect that rates will fall to 3.5% this year, but they now do not expect that a rate cut will be seen in June.

Turning to the UK/US trade deal, the official fact sheet at whitehouse.gov quotes President Trump saying:

The deal includes billions of dollars of increased market access for American exports, especially in agriculture, dramatically increasing access for American beef, ethanol, and virtually all of the products produced by our great farmers.”

The UK will reduce or eliminate numerous non-tariff barriers that unfairly discriminated against American products.

In return, the US agrees to “alternative arrangements” relating to tariffs on UK car manufacturers and on steel and aluminium.

The 10% US tariff remains in place.

It’s a positive news story that comes on the back of a long positive run in UK equities, that has seen the major indices recover nearly all of the ground they lost after the initial tariff-related panic.

While the US-China trade dispute has not yet been resolved, trade representatives from both countries are due to meet in Switzerland this weekend, in a meeting that is described as an “ice-breaker” in mainstream media.

It will inevitably take some time for this dispute to be resolved, but the mood in the markets has become one of optimism - there has been a remarkable change in sentiment in recent weeks. Let’s hope that this can be justified by some more pleasant news in the week ahead. 

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