Inflation Target Achieved but Rates Unchanged

On June 19, 2024, the Bank of England (BoE) decided to maintain its Bank Rate at 5.25%, despite achieving the 2% inflation target back in May. The Monetary Policy Committee (MPC) emphasised the necessity of a restrictive monetary policy stance to prevent inflation from becoming entrenched above the target. They highlighted ongoing concerns about underlying inflationary pressures, particularly in the labour market and wage growth, despite some signs of easing.

Economic Landscape and Future Policy

Source: Trading Economics – United Kingdom Retail Sales YoY

The BoE’s cautious approach reflects a balanced view of the economic landscape. UK GDP growth has been supported by higher real incomes and strong household consumption, which stands in contrast to the more subdued demand seen in the euro area and the robust demand in the US. This divergence in economic conditions could influence global monetary policies, potentially leading to greater convergence beyond 2024. Additionally, recent retail sales year-over-year data, as illustrated in the chart, shows a fluctuating trend with some recovery in recent months. This indicates potential resilience in consumer spending, further supporting a cautious but optimistic outlook for economic growth.

Impact on FTSE 100

For the FTSE 100, the BoE’s decision to hold rates steady is likely to be seen as a bullish signal. Stability in monetary policy can provide a supportive environment for equities, particularly in the financial and consumer sectors. Investors might view this as a sign of confidence in the underlying strength of the UK economy, leading to potential gains in the market.

Market Expectations for Future Rate Cuts

Given that the inflation target has been achieved, there is a growing consensus that the BoE might reduce the rate to 5% in its next meeting. Market participants are increasingly optimistic about a rate cut, which could further boost investor sentiment and support equity markets.

Summary

In summary, the BoE’s decision to keep the Bank Rate unchanged, while maintaining a vigilant stance on inflation, sets a positive tone for the FTSE 100, encouraging investor optimism and market stability. As always, market participants will continue to monitor economic data closely for any signs that might prompt future policy adjustments.