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 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…
