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This week has focused on things coming, but not going. Footballs coming home, apparently, but COVID is here to stay. England finally defeated Germany in a major tournament for the first time since 1966 and COVID infections remain stubbornly high. It appears the tactic is to allow higher rates, on the basis that hospital admissions and deaths remain low whilst we return to an element of normal life post Freedom Day – possibly on the 19th July. We shall see. Not only is COVID not going anywhere quickly, it has also been good to see Andy Murray back charging / hobbling / fighting on the courts of Wimbledon, a reminder of previous summers before the disruptive forces of a global pandemic.
Elsewhere, the Bank of England (BoE) voted unanimously to leave Bank Rate unchanged at 0.10% in June and corporate bond holdings at £20bn. The Committee voted 8-1 in favour of leaving the gilt component of QE unchanged at £875bn. Chief Economist Haldane once again voted to reduce this by £50bn. Yet beyond that, the Committee seemed in no rush to shift the policy outlook. This appeared to be a less aggressive summary than that of the US Federal Reserve a few weeks back.
The BoE did not provide new medium-term forecasts at this meeting, but reviewed developments since May. It revised its outlook for Q2 GDP higher to 5.5% from 4.25% in May, largely on the back of stronger growth in April. It also noted that CHAPS payments data pointed to a more stable outlook for retail spending into early June after the 9% surge seen in April. In total, the BoE noted that total UK output should be 2.5% lower than the pre-COVID level by the end of Q2. That is not a bad recovery. The BoE also stated that it was uncertain whether the faster expansion in Q2 reflected stronger expansion, or a faster rebound to pre-COVID levels. It added that the push-back in easing of final COVID restrictions to 19th July was likely to have only a “small” impact on activity, but acknowledged downside risks from “increased caution following a further rise in cases” as well as concerns about virus mutations. Finally, the BoE also noted mixed messages from the labour market, including some signs of recruitment difficulty, but that the recent fall in unemployment reflected a rise in “economic inactivity”.
Minutes from June’s meeting showed that the Monetary Policy Committee (MPC) spent a lot of time focusing on price developments. The MPC clearly focused on the rise in international prices and discussed the sharp shift in demand for goods, rising commodity prices, supply-side constraints and bottlenecks, but concluded that it considered these developments to be “transitory”. That said, the recent rise in inflation to 2.1% had exceeded previous BoE forecasts by 0.3ppt and the BoE revised its outlook for the peak in the transitory inflation spike to “exceed 3% for a brief period”. As I have written before, whether higher inflation is transitory or longer lasting is key to the outlook for the remainder of the year.
Reassuringly for investors, but not for deposit holders, the BoE stated both that policy should “lean strongly against downside risks and ensure that the recovery was not undermined by a premature tightening in monetary conditions” and that policy would not be tightened before “clear evidence of significant progress to eliminate spare capacity and achieve the 2% inflation target sustainably”. As such, we see no near-term impetus to adjust monetary policy and support will remain in place for now.
For now though, do not worry about the economics or the markets, not much is changing for the time being. Instead, have a good weekend, enjoy Wimbledon, the football, or whatever else takes your fancy.