London (Parliament News) – Bank of England cautious on interest rate cuts as UK PMI strengthens, signaling economic recovery amid inflation concerns.
The possibility of a summer cut in UK interest rates was reduced on Tuesday after the Bank of England’s chief economist warned against cutting too soon and a critical survey signalled the economy maintained over the last month.
The Bank’s chief economist, Huw Pill, expressed concerns that inflation, which is expected to drop below its 2% target within a few months, could recover after a recovery in economic growth. Speaking in London, Pill stated: “We still have a reasonable way to go before I am convinced that the persistent momentum in underlying inflation has stabilised at rates consistent with the achievement of the 2% inflation target on a sustainable basis.”
After his address financial markets pushed back anticipations that the Bank would start cutting interest rates to September. Earlier in the day an August rate dent had been fully priced in. His remarks came as a closely monitored survey of business activity by S&P Global showed a powerful performance by the services sector and a peak in job hiring, in signs that businesses stood heading into the summer in a buoyant mood.
How strong is the UK economy?
The moment UK purchasing managers’ index (PMI), which surrounds the services and manufacturing sectors, increased to 54 in April, up from 52.8 in the prior month. A figure above 50 indicates a period of expansion.
Jonathan Haskel, who poses with Pill on the Bank’s nine-strong monetary policy committee, revealed at a separate event in London on Tuesday that the recovery underway in the UK could slow the first interest rate cut by the central bank. Haskel expressed more slack in Britain’s labour market was needed to be confident that inflation would stay at 2%.
Is the UK labor market weakening?
“The labour market is central to the inflation aspect,” Haskel spoke at a seminar at City University of London’s Bayes Business School when questioned if he now thought it possible inflation would hold at 2% rather than rise later this year. He stated the number of job vacancies had fallen while unemployment had risen, showing that the labour market was tiring, but it was unclear if it was draining quickly enough to keep inflation on target.
“Reasonable people might reasonably disagree about the risks,” Haskel said. Last week the deputy governor, Sir Dave Ramsden, stated he thought inflation may stay close to 2%. It is now at 3.2%. The peak in the PMI’s above estimates by City economists is a double-edged blade for the chancellor, Jeremy Hunt, who would like to notice interest rates coming down in an election year.
Can the UK sustain economic growth?
Chris Williamson, the chief business economist at S&P Global Market Intelligence, expressed the UK recession in the second half of last year was being left behind, though expansion remained modest. “Early PMI survey data for April indicate that the UK economy’s recovery from recession last year continued to gain momentum,” he added.
“Improved growth in the service sector offset a renewed downturn in manufacturing to propel overall business growth to the fastest for nearly a year, indicating that gross domestic product (GDP) is rising at a quarterly rate of 0.4% after a 0.3% gain in the first quarter.”
Official figures next month surrounding GDP from January to March are expected to confirm the UK is no longer in recession. Initial calculations showed the economy shrank barely in the third and fourth quarters of 2023, indicating a shallow technical recession.
What’s the outlook for the Eurozone?
S&P surveys of business movement across the eurozone also showed encouraging economic signs of a broad recovery. Germany returned to increase in April and France came close to completing a period of contraction, while most other economies in the 20-member bloc rose strongly, giving the most significant boost to growth for almost a year. The HCOB Flash eurozone combined PMI output index was at an 11-month high of 51.4, up from March’s 50.3, a level that indicates faster growth.