Comment: ‘An imminent rate cut seems unlikely’

Rob Morgan comments: “The UK economy could be on the road to recovery after it fell into a shallow recession in the second half of last year. GDP expanded by 0.2% in January 2024, in line with expectations as it rebounded from a weak end to 2023.
 

UK economy regains momentum

 
“While the first quarter of 2024 has got off to a reasonable start, it is only that. GDP is estimated to have fallen by 0.1% in the three months to January 2024, compared with the three months to October 2023. We must await data for February and March to confirm whether the UK has shaken off its mild recession.

“Nonetheless, today’s figures are promising and indicative of an economy starting to regain momentum, driven by a new year rebound in the services sector, construction and a reinvigorated consumer. Manufacturing was an area of disappointment, but it may well have been held back by supply chain disruption owing to the conflict in the Middle East.

“Importantly, having battled the impact of stubborn inflation and high interest rates, many households are now starting to benefit from inflation falling more rapidly than wage growth. Retail sales figures for January showed sales volumes were up 3.4% month-on-month, offsetting the steep fall seen in December.

“Amid a resilient jobs market, this boost to spending power in real terms bodes well for growth in the coming months. Recently announced tax cuts and the planned increase in the National Living Wage in April also stand to offset the headwind of higher interest rates and pull the UK out of its shallow recessionary dip.
 

What does it mean for interest rates?

 
“Clear signs of economic weakness would give confidence to the Bank of England to cut interest rates later this year. Although inflation is still twice the Bank’s 2% target, it should continue to fall and gradually approach that level by the autumn.

“Yet with employment and earnings holding up alongside an economy that is now showing signs of resilience, an imminent rate cut seems unlikely. The Bank will want to see a more substantial decline in wages, and in more sticky services inflation, before reducing borrowing costs. There are signs this will eventually come through. Job vacancies continue to fall, which indicates companies are wary of over hiring in an uncertain environment, but until these weaker indications are reflected in other data the Bank will be minded to keep rates on hold for the time being.”
 
Rob Morgan is Chief Investment Analyst at Charles Stanley