So this week, we’ve had two of these BoE officials leak hawkish statements – is that a coincidence? Despite still strong wage growth in the UK, they are circling back to a more dovish line on monetary policy. Indeed, Deputy Governor Francesca Lombardelli and external MPC member Michael Greene both supported the recent 25 basis point rate cut. Most significantly, they brought attention to the challenges of an increasingly complex economic environment.
Lombardelli and Greene characterized their votes in favor of the rate decrease as narrowly focused. The Bank warned against inflation remaining too high in the UK, which is still an issue troubling policymakers today. Their comments highlight the tough line that must be walked with regard to fighting inflation while stimulating economic activity. This difficulty is compounded by increasing costs for business and uncertainty from tariffs.
Even with these inflationary pressures, the UK labour market has remained surprisingly resilient. The jobless rate ticked up a bit to 4.5%, reflecting a small rise in unemployment. The UK’s number of payrolled employees fell by 33,000, indicating pressure on job creation. This is not due to wage growth slumping, as earnings are increasing at a remarkably strong rate of greater than 5%. All told, including bonuses, wages are up 5.5%, showing just how robust the demand for labor has been in this economy.
Market expectations for additional MPC rate cuts this year still stand at around 50 bps. This anticipatory pricing highlights the overall cautious sentiment among investors as they continue to feel their way through a very uncertain economic environment. The BoE’s recent decision to implement a 25 basis point reduction illustrates its commitment to supporting economic activity while remaining vigilant about inflationary risks.
Together, Lombardelli and Greene’s recent remarks are a hopeful sign that the Fed plans to stay the hawkish course in future policy deliberations. Many of them raise the alarm on unsustainable levels of inflation. That means any additional cuts will be largely dependent on changes to wage growth and macroeconomic stability.