The UK economy demonstrated unexpected resilience, growing by 0.3% in the second quarter of the year, challenging economists’ forecasts of stagnation. This expansion, measured from April to June, caught most economists off guard, expecting little or no change in economic activity. The newly released figures have sparked discussions among economists and market analysts regarding potential implications for the Bank of England’s monetary policy.
Even before all of this, most economists had predicted that the UK economy would stagnate in the second quarter. Their reasoning for holding out this long was largely focused on inflationary pressures and unknowns in the global economy. With the recent 0.3% growth rate, it has sent everyone back to the drawing board to rethink these projections. According to current swap market expectations, future base interest rate hikes are highly unlikely. That trend seems destined to continue for all of the next two or more MPC meetings at least.
So base rates have stood mostly still. There remains a two-in-three chance that the Bank of England may still introduce another rate cut before December arrives. Analysts are watching economic indicators with bated breath and speculating that any major changes will affect the central bank’s policy-making calculus. The unexpected robust growth figures, combined with high inflation still very much a part of the equation, have led to a mood of cautious optimism.
The British pound has the potential to receive a boost this year. This probably reflects the absence of any future rate cuts being anticipated. Investors and traders will smartly be focused on these things and rightly responding to them. They will consider the overall economic outlook and its impact on currency markets. The pound’s stability would likely be a key consideration in bolstering investor confidence during what some might anticipate would be challenging economic conditions.
Looking forward, June’s inflation report will be the most influential economic report of the incoming July quarter, setting the tone for wildly diverging economic projections. Some analysts are even predicting that this report will provide the biggest upside surprise. If so, it could trigger calls for more loosening steps from the Bank of England. Of course market participants are very focused on inflation—the biggest of the red flags—because those readings can have an immediate impact on monetary policy outlook.