BoE’s Goldilocks monetary policy report

The Bank of England kept rates on hold on Thursday, however, the interesting part of this meeting was the release of the second Monetary Policy Report of the year. As expected, growth was revised higher, while inflation was revised sharply lower for the UK. The BOE no longer sees UK inflation with a 3% handle in its forecast period, which is out to 2027. This is a big shift for the UK, and suggests, that the UK’s inflation problem is now under control, and price pressures have slowed sharply even though the economy is near full employment. While the BOE thinks that it is too soon to declare victory over the cost-of-living crisis, the BOE also thinks that the key indicators of inflation persistence are moderating, which is helping the overall disinflation trend to continue. The BOE’s forecasts for the unemployment rate were also revised lower, which could mean that the UK economy will get its very own soft landing.

Upbeat forecasts from BoE sends UK stocks to record highs

The BOE expects the UK’s growth path to move in a positive direction over the forecast period. GDP is expected to be 0.2% in Q2, rising to 0.9% in a year’s time, then 1.2% in 2026 and GDP is expected to speed up to a 1.6% growth rate in 2027. This is a positive outlook for the UK economy and suggests that Ben Bernanke’s review of BOE forecasting models has already worked some magic on the figures. Today’s Monetary Policy Report tells a different story about the UK economy: one where growth is decent, unemployment remains low, and the inflation rate continues to recede. This positive outlook is already playing out in the financial markets: the FTSE 100 has made a fresh record intra-day high at 8,384, while the pound has dropped back to $1.2450 vs. the USD, and UK Gilt yields are also lower. The 2-year Gilt yield is down by approx. 6 basis points on Thursday.

The good news story contained in this Monetary Policy Report suggests that the sun is finally shining on the UK’s economic outlook, which could help its stock markets play catch up. The FTSE 350, a broader stock market index that is more domestically focused, has also made a record high on Thursday, and this may continue now that the BOE has added some positive PR spin to the UK economic outlook. The FTSE 100 is currently higher by 6.18% on a currency adjusted basis year to date, which is better than the French Cac’s performance so far this year and is only 2% lower than the performance of the main US indices.

Positive economic PR spin from BoE could boost UK stocks

There has been calls for something to reinvigorate the financial markets in the UK, particularly the stock market, as it deals with a wave of M&A activity as well as de-listings from the main index. A positive economic backdrop could give the UK index a boost and put others off from leaving the London Stock Exchange.

The next move from the BoE

While this report was a significant upgrade of the UK’s economic prospects, it has not given the green light to a rate cut in June and said the BOE remains data dependent. This means that the CPI reading on May 22nd has taken on extra importance, as well as wage data that is released next week. The BOE, like the Fed, remains data dependent, which means that the market will be very reactionary to economic data releases as we get closer to the crucial 20th June BOE meeting.