Views on the News

What you’ll learn:

• UK interest rates stay at 16-year high of 5.25%
• UK exits recession with fastest growth in two years
• China’s data continue to improve.
  

Headline 1: UK interest rates stay at 16-year high of 5.25%

The Bank of England kept interest rates unchanged for the sixth meeting in a row but Andrew Bailey, the Bank’s governor, said that more encouraging news on inflation could steer the central bank towards cutting borrowing costs as soon as June.

Members of the nine-strong monetary policy committee voted 7-2 in favour of leaving monetary policy stable at 5.25%, a 16-year high.¹

Luke Pearce, Senior Investment Strategist: While the Bank of England (BoE) held rates steady, it's becoming increasingly clear they are prepping for their first rate cut during summer, provided economic data continues to behave. There were a few notable takeaways from the meeting.

Firstly, there are now two Monetary Policy Committee (MPC) members who voted for a 25bps cut this meeting, compared to just one last time.

Second, the MPC cut its inflation forecast. Based on where market expectations are, they are now forecasting inflation to drop below target two years from now. This is a hint around BoE expectations vs market pricing.

Lastly, minutes included language around the timing of the first cut. They hadn't previously referred to timeframes, but are now talking about "forthcoming data releases". Governor Bailey called this out during the press conference and emphasised the significance of this change.

How quickly they move to first cut rates will depend on the incoming data. The UK employment report this week will be key in that respect, as well as upcoming inflation data.

Headline 2: UK exits recession with fastest growth in two years

Stronger than expected growth at the start of the year saw the UK emerge from recession.

The economy grew by 0.6% between January and March, the fastest rate for two years, official figures showed.

However, while the overall economy is growing again, many people might not be feeling any better off. When the impact of inflation – the pace of price rises – and population growth are stripped out, growth per head is still 0.7% lower than a year ago.²

Luke Pearce, Senior Investment Strategist: For much of this year, investors have been focusing on US economic outperformance (‘US exceptionalism’). However, we are beginning to see tentative signs of a broadening out of improving growth dynamics across the rest of the world, including the UK.

The large, welcome, upside surprise to UK Q1 GDP is the latest data point which hints that the UK economy is on the mend, while survey data continues to recover from the lows seen last year. As a result, economists are revising up their growth expectations for UK and Europe.

Given the extreme (bullish) positioning in the US dollar, it wouldn’t be surprising to see some near-term weakness in the US dollar if these macro trends show further signs of improving.

Headline 3: China’s data continue to improve

China’s exports were up 1.5% year-on-year in April, slightly stronger than expected (1.3%).

On the other hand, imports (+8.4%) soared above expectations (+4.7%), helped by a low base, higher commodity prices, and ongoing fiscal support likely strengthening domestic demand.

This is the latest data point that suggests improving macroeconomic momentum in China.³

Luke Pearce, Senior Investment Strategist: There has been a swift recovery in China-sensitive assets in recent weeks. Improving economic momentum has certainly been part of that, but we’ve also seen policy support, including the recently announced ‘9 measures’, aimed at capital market reforms.

The performance of China-sensitive assets this year epitomises why, as investors, we care so much about what’s already priced in. Swings in investor sentiment can create lucrative opportunities. You often see strong recovery in asset prices during the transition of things being really bad to just kind of bad.